Paving the Way:

Maximizing the Value of

Private Finance in Infrastructure
Prepared in collaboration with PricewaterhouseCoopers
World Economic Forum USA
New York, USA
August 2010

Paving the Way:

Maximizing the Value of
Private Finance in Infrastructure

Prepared in collaboration with PricewaterhouseCoopers

 This publication has been prepared for general World Economic Forum USA Inc.
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Contents

Contributors v Part 4: Case Studies 83

Preface vii List of Case Studies 85

Case Study 1: Delhi International Airport Limited .....................86

Executive Summary ix Public Private Partnership for Critical
Infrastructure

Case Study 2: The Cross City Tunnel ........................................90

Part 1: Laying the Foundations: Requirements 1 The Challenge of Long-Term Forecasting

for Private Finance Case Study 3: Lekki Toll Road Concession ...............................94
Arranging Local Financing
1.1: Defining and Measuring the Private Finance
Opportunity............................................................................3 Case Study 4: Ontario Highway 407 Toll Road .........................98
Best Practices in Dispute Resolution
1.2: The Approach to Private Finance
for Critical Infrastructure......................................................11 Case Study 5: Port of Baltimore, Seagirt Marine Terminal......102
Long-Term Revenue Sharing Agreement
1.3: Accommodating the Long-Term Nature of
Infrastructure .......................................................................15 Case Study 6: Chicago Skyway ...............................................106
Long-Term Concession of a Real Toll Road iii
1.4: Navigating the Political, Legal, and
Regulatory Environment ......................................................21 Case Study 7: Doraleh Container Terminal ..............................110
Multilateral Support Building
1.5: Understanding and Managing Public Perceptions...............25
Case Study 8: Port of Miami Tunnel........................................114
Public Private Partnership for a Technically
Challenging Project
Part 2: Building the Structure: Developing 29
the Market for Private Finance Case Study 9: Florida I-595 Road Project ................................118
Arranging Financing During an Economic Crisis
2.1: Creating a Program of Prioritized Opportunities..................31
Case Study 10: The Canada Line...............................................122
2.2: The Challenge of Building and Sustaining
Combining Public and Private Finance
Transaction Skills .................................................................37
Case Study 11: BrisConnections ...............................................126
2.3: Multilateral Banks: Building Skills and Markets...................41
A Cautionary Tale of Retail Investment in
2.4: Understanding and Managing Land Value ...........................45 Infrastructure

Part 3: Planning for the Future: The Way 49 Appendices 131

Forward for Private Finance
3.1: Addressing the Appetite for New Infrastructure.................51
Appendix A: An Infrastructure Finance Primer 133
3.2: Unlocking the Capital Markets ............................................57
A.1: Sources of Debt and Equity ..............................................135
3.3: The Specialization of Infrastructure Funds ..........................63
A.2: A Source of Private Finance: Equity ..................................145
3.4: Tapping the Retail Investor ..................................................60 A.3: A Source of Private Finance: Debt ....................................155

3.5: The Obstacles To Greater Pension Fund Investment .........73 A.4: Multilateral Lending and Other Enablers ...........................167
A.5: Contractual Approaches ....................................................171
3.6. Government as Provider and Facilitator of Finance ............77
A.6: Risk and Uncertainty .........................................................175

Appendix B: List of Acronyms 181

Acknowledgments 183
 Contributors
Contributors

LEAD AUTHOR Michael Till

Partner and Co-Head, Infrastructure
Victoria Dickinson
Actis
Project Manager, Investing in Infrastructure project
World Economic Forum USA Hela Cheikhrouhou
(on secondment from PricewaterhourseCoopers) Division Manager, Infrastructure Finance
African Development Bank
EDITORS Rajat M. Nag
James Bilodeau Managing Director General
Associate Director, Financial Services Industries and Asian Development Bank
Head, Emerging Markets Finance Graeme Bevans
World Economic Forum USA Vice President and Head of Infrastructure
Anuradha Gurung CPP Investment Board
Associate Director, Investors Industries Stephen Vineburg
World Economic Forum USA CEO, Infrastructure
Tony Poulter CVC Capital Partners
Partner Hazem Shawki
PricewaterhouseCoopers Managing Partner
EFG-Hermes Private Equity
FROM THE WORLD ECONOMIC FORUM USA
Lennart Blecher
v
James Bilodeau Senior Partner
Associate Director, Financial Services Industries and EQT Partners
Head, Emerging Markets Finance
Pierre Coindreau
Max von Bismarck Principal Advisor
Director and Head, Investors Industries European PPP Expertise Centre
Anuradha Gurung Bayo Ogunlesi
Associate Director, Investors Industries Chairman and Managing Partner
Global Infrastructure Partners
Ibiye Harry
Project Associate, Financial Institutions Industries Chris Lee
Founder and Managing Partner
Benjamin Ochieng
Highstar Capital
Intern, Financial Institutions Industries
Luis Miranda
Kevin Steinberg
President and CEO
Chief Operating Officer and Head, Center for Global Industries
IDFC Private Equity
(New York)
Rashad Kaldany
FROM PRICEWATERHOUSECOOPERS Vice President Asia, Eastern Europe, Middle East and North Africa
International Finance Corporation
Richard Abadie
Partner Marc Lipschultz
Global Head Energy and Infrastructure
Victoria Dickinson
Kohlberg Kravis Roberts & Co
Director
Sadek Wahba
Tony Poulter
Global Head
Partner
Morgan Stanley Infrastructure

EXPERT COMMITTEE Samara Barend

(in alphabetical order by organization) Former Executive Director
New York State Commission on State Asset Maximisation
Cressida Hogg
Managing Partner, Infrastructure Stephen Dowd
3i Senior Vice-President, Infrastructure
Ontario Teachers Plan Pension Board
Robbert Coomans
Advisor to the Board Richard Abadie
APG Partner
PricewaterhouseCoopers
Mustafa Abdel-Wadood
Managing Director and CEO
Abraaj Investment Management
Contributors

Nick Pitts-Tucker
Former General Manager, Co-Head of Corporate Banking Group II
and Structured Finance Department
Sumitomo Mitsui Banking Corporation Europe Ltd
Ryan Orr
Executive Director, Collaboratory for Research on Global Projects
Stanford University
Robert Dove
Managing Director, Infrastructure
The Carlyle Group
Polly Trottenberg
Assistant Secretary for Transportation Policy
US Department of Transportation

vi

Preface
KEVIN STEINBERG, Chief Operating Officer, Head of Center for Global Industries, World Economic Forum USA, and
MAX VON BISMARCK, Director and Head, Investors Industries, Center for Global Industries (New York), World Economic Forum USA
The World Economic Forum is proud to release this
Report, Paving the Way: Maximizing the Value of Private
Investment in Infrastructure. The project was initiated in
January 2009 as part of the World Economic Forum’s
Investors and Financial Services Industries Partnership
programs to explore the role of private capital in meet-
ing the world’s growing infrastructure needs.
Multiple studies in the recent past have emphasized
the importance of infrastructure as an enabler for devel-
oping economies, and the fact is that vast segments of
existing infrastructure in the developed world are
becoming deficient. Estimates for global infrastructure
investment need ranges as high as US$3 trillion per year.
The World Economic Forum’s Global Risks 2010 report
highlighted underinvestment in infrastructure as one of
three key global risks to monitor. Global Risks 2010 fur-
thermore stresses the awareness that underinvestment in
infrastructure is one of the most highly interconnected
risks, with potential systemic implications.
Given the dramatic need for investments in infra-
structure at a time when many government budgets
are under severe pressure, the role of private capital in
financing infrastructure seems more critical than ever.
This Report aims to showcase both the opportunities
and the challenges associated with attracting and involv-
ing private investors in the provision of infrastructure.
The Report outlines features of successful infrastruc-
ture projects using illustrations from countries that have
tapped private finance markets. Examples include proj-
ects that demonstrate the results of creating a political,
legal, and economic environment that is conducive to
investment; establishing a program of opportunities;
having a contractual and regulatory framework that
deals with issues effectively and fairly; having forums
for stakeholders to share experiences; and involving the
public at all stages.
The Report highlights the notion that private finance
will invest in new infrastructure when the investment is
based on established practices and approaches, but the
challenge remains when the project is novel, untested, or
in a new market. Other key findings include:
• The costs and terms of commercial debt have
changed significantly as a result of the global
economic crisis and there remains a challenge of
reinvigorating the capital markets as a source of
finance for infrastructure.
Preface
• Governments have become lenders of last resort
and, as there is a revaluation of the public-private
finance relationship, it is possible that more
countries will set up state infrastructure banks.
• A move to more specialized infrastructure funds to
give investors a better alignment of risk with reward
is expected. Investors will also place greater value
on fund managers with experience of ongoing
infrastructure asset management.
• Retail finance participation in infrastructure funds
is likely to grow, but it requires a clear articulation
of the value proposition and the threats to
achieving it.
The Report itself is the result of a year-long multi- vii
stakeholder collaboration of the World Economic
Forum and PricewaterhouseCoopers with leading
industry practitioners, policymakers, and academics
participating in interviews and workshops around the
globe. Throughout this process, intellectual stewardship
and guidance was provided by an actively engaged
Expert Committee.
We trust that this publication will provide relevant
input and catalyze important further dialogue among
governments, investors, and other stakeholders regarding
the role of private finance in infrastructure. Moreover,
we hope that the insights it provokes may contribute
toward ensuring that the risks associated with a lack of
global infrastructure investment are addressed and their
potential negative impact on future global growth and
economic growth mitigated.
We wish to thank the members of the Expert
Committee, interview and workshop participants, and
our partners at PricewaterhouseCoopers (especially
Victoria Dickinson) for their invaluable support.We
would also like to thank James Bilodeau and Anuradha
Gurung at the World Economic Forum for their leader-
ship of this project.

Executive Summary
In early 2009, the subject of infrastructure financing
came to the fore as many countries announced infra-
structure spending as part of fiscal stimulus programs.
Yet, in many respects, the focus on stimulus spending
distracted attention from the fact that countries need to
develop sustainable, long-term models to fund the
development, expansion, replacement, or renewal of
their national and regional infrastructure.
Estimates of global infrastructure need range as high
as US$3 trillion per annum. Current spending on infra-
structure is well below this threshold even when fiscal
stimulus is considered. Unless governments radically shift
their budget priorities or increase taxation a large
financing gap will continue to exist. Against this back-
drop the role of private financing is becoming increas-
ingly critical to ensure that inadequate infrastructure
does not become a bottleneck for economic growth and
social progress.
Although private participation in the provision of
infrastructure has grown in recent years, in many mar-
kets and sectors that growth has been relatively limited
and could even reverse in the face of greater demand.
This has occurred despite considerable attention being
paid to the role of private financing in infrastructure
over the last two decades. We believe this is because of
another serious and persistent gap with respect to the
funding of infrastructure: that of perception between the
public and private sectors. A primary purpose of this
report is to help close this “perception gap” by provid-
ing a common reference point as to what considerations
are important to providers of private capital and how
the public sector can develop its capacity to address
them.
This Report aims to establish this common reference
point in several ways. At its most basic, the Report pro-
poses a common definition of infrastructure (at the
beginning of Part 1) that is relevant from a private
financing perspective.
The Report also lays out a framework for how
policymakers can more fully maximize the value of
private finance in supporting infrastructure development
(Parts 1, 2 and 3). This framework is presented as a
progression from “foundational requirements” for
involving private finance in infrastructure to a vision
of how the large amounts of private capital needed can
be mobilized in the future. This framework is a key
organizing principle and takeaway of the Report and
Executive Summary
is summarized in the schematic at the end of this
Executive Summary. Finally, the Report makes extensive
use of case studies to illustrate and support this frame-
work with experience from across a variety of regions
and projects. These are referenced throughout the report
and fully presented in Part 4 of the report. In addition,
in Appendix A, the Report provides a primer on the
infrastructure finance market. Key findings from the
Report are summarized below.
Defining Infrastructure
It is important to define the term infrastructure since
there are many different types, not all of which are
appropriate for private funding. From a financing per-
spective, infrastructure opportunities are usually capital
intensive, there is a tangible asset to operate and main-
ix
tain, and the asset is expected to generate cash over the
long term. Yet, there are other important distinctions
from a financing perspective such as the type of project
(i.e. social vs. economic infrastructure), contractual
approach (e.g. partnership, concession, privatization etc.),
phase of physical development (i.e. greenfield vs. brown-
field), and stage of market development (e.g. new and
innovative vs. new and tested). These characterizations
more precisely address the chief concerns of private fin-
anciers as to whether they will achieve forecasted
returns and the likelihood of loan repayment. A focus
just on greenfield or brownfield designations or sector
(e.g. energy vs. transportation) is too limited from a
financing perspective.
Laying the Foundations: Requirements for Private
Finance
Even when infrastructure is considered “too important to
fail,” private finance can still be an option.
For private finance to be an option one needs to evalu-
ate the robustness and sustainability of the different
financing options throughout the asset life. It is also nec-
essary to consider what sort of failure might occur—
whether it be a gradual erosion of service, the financial
collapse of the private-sector party, or the sudden and
complete shutdown of the asset—and how to mitigate
the impact of such a failure. The tradeoff between the
level of fees or charges for the infrastructure and the
robustness of financing should be analyzed explicitly.
Executive Summary
Given the long life of many infrastructure assets, parties
must explicitly address all the tradeoffs within different
commercial, contractual, and financing approaches.
It is often very difficult for both the private and public
parties to forecast costs and revenues over the long term,
particularly when those costs and revenues depend on
public usage. But the consequences of getting this
wrong may be considerable. Governments risk incurring
the public’s wrath if the concessionaire makes too big a
profit, while the concessionaire risks going bankrupt if it
loses too much money.
Contract or concession length should be determined by
consumer and investor considerations – not necessarily
the life of the asset.
Three key factors should be considered when setting
contract or concession policy. First, if the infrastructure is
monopolistic, how should the protection of consumers
be balanced with maintenance of any necessary capital
investment? While a monopoly might lead to a shorter
contract, the protection of consumers might lead to a
longer one. Second, if debt is being raised to fund infra-
structure development, over what period will it be
repaid? Forcing repayment over a short period could
result in higher, potentially unaffordable, fees or user
charges. Third, how long will investors need to achieve
x an “acceptable” level of return—and what is “accept-
able”?
Private financiers will not invest in infrastructure without
institutional certainty.
Whether or not private financiers choose to invest is
determined not just by the details of the specific trans-
action but also by the wider political, legal, and eco-
nomic environment, including any uncertainties about
how governments themselves may act at any stage. We
believe this is as much an issue in developed economies
as in emerging ones, and seeking private-sector partici-
pation is no substitute for developing the institutions
that create an environment conducive to investment.
Understanding and managing public perception are
integral to the success of any deal.
Both public and private parties may not always fully
appreciate consumer sentiment. In fact, public sentiment
can make or break a deal—and responses vary depend-
ing on the nature of the infrastructure. People are used
to the idea of mobile phone networks being in private
hands, for example. However, they often regard other
forms of infrastructure, especially social infrastructure, as
the exclusive domain of governments. It is important to
involve the public in every stage of the process, to artic-
ulate the options clearly, and to ensure that transparent
methods for measuring and maintaining operational
quality exist. Mechanisms such as profit sharing may
mitigate concerns about excessive profits for the private
party.
Building the Structure: Developing the Market for
Private Finance
Investment by the public sector in a comprehensive
program of prioritized opportunities can attract more
private capital.
Those countries that have been most successful in
attracting finance have established programs of priori-
tized investment opportunities with a number of fea-
tures, including clear political support, a proper legal and
regulatory structure, a procurement framework that can
be understood by both procurers and bidders, and a
credible project timetable. These country programs are
more than just marketing - they eliminate key frictions
such as long project lead times and unclear political risk
which directly impact the viability of the business case
for investment.
Building transactional capacity within government bodies
underpins all successful procurement programs.
Even countries with years of experience in completing
complex public-private deals may find it difficult to sus-
tain the necessary commercial expertise and ensure that
they get value for money. The recent economic turmoil
has exacerbated the situation, highlighting the need to be
able to react quickly to changes in the financial environ-
ment. To tackle this challenge it is important to maintain
dedicated procurement teams that are well trained with
career paths that will encourage them to stay. The devel-
opment of national and regional networks of practitioners
to share knowledge and experience can be important as
well. Investing in these transactional capabilities can be
as important as investing in the infrastructure assets
themselves.
Multilateral banks continue to move beyond their role as
direct funders of infrastructure to help build transactional
capacity and provide risk mitigation.
Adequate finance is only one of the conditions that
must be met for an infrastructure project to succeed.
Essential skills and improved conditions in the country’s
market environment are also crucial, and multilateral
banks are able to support transactions by providing
political cover and resources, such as the joint initiative
Multilateral Public-Private Partnership in Infrastructure
Capacity Development (MP3IC) program, to assist in
these areas. It is important for countries to become
aware of and know how to utilize these resources most
effectively.
Public and private parties will both benefit from
collaboration in land procurement and valuation.
The procurement and valuation of land for new infra-
structure is always a controversial subject. The issue is
not so much who has the power to assemble land—this
usually rests with public parties—but rather who pays
for and receives the benefit of the change in land value

resulting from the infrastructure development, how the
change is calculated, and at what point in the transaction
timetable it is calculated. Several instances exist in which
land has been effectively monetized to pay for infra-
structure. One such example is the supplement the
Greater London Authority will levy to contribute to the
funding of a new train link across Britain’s capital.
Planning for the Future: The way forward for private
finance
Private investors care more about whether an investment
is based on established practices than if it is “greenfield”.
Many policymakers believe that private financiers are
only really interested in investing in projects that already
generate an income and do not want to invest in build-
ing new infrastructure. This is an oversimplification.
There is little about the design, construction, operation,
or revenue structure of some new infrastructure that
cannot be mitigated through contracts based on estab-
lished practices. Securing private finance is a problem
only when a project is very innovative or unusual, or
involves new technology or markets, making its opera-
tional and financial performance difficult to predict.
Explicitly recognizing and communicating these distinc-
tions can attract private finance to new categories of
infrastructure in the future.
Higher prices, shorter terms, and reduced capacity for
large underwriting by banks may extend well beyond the
current financial turmoil.
Overall commercial bank lending for infrastructure
projects proved remarkably resilient in 2008 and 2009,
despite the global economic crisis. But there was
reduced lending in some sectors that rely on long-term
lending, particularly concessions and public private part-
nerships. For all debt, there have been material changes
to terms and cost. As a result, many transactions have
proceeded with a “club” of banks collectively arranging
the debt rather than using the traditional underwrite-
and-syndicate process. Shortened terms may make bank
lending more suitable for the construction phase of
many projects.
Capital markets may help fill the long-term infrastructure
finance gap – if several key obstacles can be overcome.
While there remains a market for well-structured
transactions, overall demand for long-term infrastructure
bonds has declined dramatically, despite the apparent
attraction of such products for long-term investors, such
as pension funds, that aim to match their assets with
their liabilities. This decline is particularly noticeable in
the bond market for public-private partnership and con-
cession-type projects, largely because of the collapse of
the monoline insurers. Apart from providing insurance
against defaults and thus enhancing the credit rating of
Executive Summary
the underlying investments, the monolines supplied the
transaction skills and due diligence that many capital
markets investors were unable to supply for themselves.
The challenge now is to reinvigorate the capital markets
for infrastructure. This may include changing the risk
profile to raise the underlying rating, encouraging the
development of substitutes for the guaranteed bonds the
monolines offered, or building transaction skills in the
banks involved in infrastructure bond issuance.
Applying a regulated asset-based approach such as those
often used by utilities may mobilize more private invest-
ment.
Regulated infrastructure utilities have been successful
in continuing to issue bonds in the current economic
climate. This raises the question whether the regulated
price and asset-based approach that underpins the utili-
ties’ business model should be adapted for other types of
infrastructure, such as those projects more typically
employing a concession-based approach. A regulated
approach reduces long-term risk transfer to the owner
or operator in exchange for limiting the upside of
investment return. This may be attractive to many
investors though governments will have to consider the
risks they themselves will then incur. The specifics of
each project and the policy priorities of governments
will determine whether this approach will be appropri- xi
ate.
Specialization will be important to the development of
infrastructure funds.
There is currently a prevalence of general and private
equity-type funds that focus on a range of different
sectors in developed markets. Many also do not differen-
tiate between transaction approach such as concession
contracts and privatizations. By contrast to the general
nature of many funds, the economic crisis has highlight-
ed the variation between infrastructure types as some
subsectors have been largely immune to the economic
turmoil while others (such as those that rely on user
demand) have been more exposed. We believe these
variations in the performance and specific charateristics
of infrastructure types will lead to the development of
more specialized funds that will help investors discrimi-
nate between different opportunities. This may be an
important factor in channeling the massive amounts of
uncommitted capital that has been raised in recent years
into viable investment opportunities.
The uneven availability of offerings in different markets
may accelerate fund activity and investment in emerging
markets, particularly the BRIC countries.
As the full effects of budget deficits materialize, there
may be fewer opportunities to invest in established mar-
kets. Conversely, there may be more opportunities to
invest in emerging economies that have increasingly sta-
ble political, legal, and economic regimes. This push/pull
 Executive Summary

effect may be dampened by the desire to offset budget
deficits through asset sales that could maintain interest in
established markets.
Retail participation in infrastructure projects is likely to
grow.
Retail investors in infrastructure projects have experi-
enced very mixed fortunes to date, and several serious
obstacles must be overcome before involving them more
widely. Nevertheless, there have been some successful
examples of retail participation in the infrastructure
markets. We think that retail participation will increase
over the next few years, as understanding of the infra-
structure offering improves.
public and private sector work closely together to over-
come any gaps in understanding and then implement
this common vision to mobilize the massive amounts of
private capital that are needed. Even as parties from the
public and private sector address the exigencies of the
current economic environment they must look ahead in
defining sustainable long-term roles (for each of them)
which maximize the value of private investment for all
stakeholders in the decades to come. We believe that the
framework and case studies presented in this Report are
useful tools for promoting this process.

Pension funds may not invest as much as many believe

until key obstacles are overcome.
Many believe that the amount of money that pension
funds invest in infrastructure will increase significantly in
the short term. This may be true for some of the larger
pension funds that have an established position in the
infrastructure market. However, many pension fund
managers, often from smaller funds, still regard infra-
structure as a specialist investment. Moreover, there is a
geographic mismatch between the places in which most
xii pension funds are held and the places in which there are
infrastructure investment opportunities. The infrastruc-
ture community must therefore help to develop a better
understanding of the asset class within the wider pen-
sion fund manager and trustee community to promote a
broader mobilization of institutional capital in the
future.

Governments may increasingly become financiers as well

as procurers of infrastructure.
The role of governments as financiers grew in the
recent financial crisis as the amount of long-term debt
available was severely constrained. Different countries
have taken different approaches, and the means they
have adopted to stimulate private finance vary accord-
ingly and range from capital contributions to co-lending
and debt guarantees. However, one common issue is
how and when government support will be withdrawn.
A second is whether countries should set up state-
owned infrastructure banks. Several such banks already
exist, operating at both national and regional levels, and
we anticipate that more will be established in the next
few years.

Conclusion
The combination of pressing need for infrastructure
investment as an economic and social priority and
government budget pressure means that the private
financing of infrastructure projects is more important
than ever. With this urgency, it is imperative that the
Paving the Way:
Maximizing the Value of Private Finance in Infrastructure
UNDEVELOPED OR
UNSUCCESSFUL USE OF
PRIVATE FINANCE
Market Characteristics
• Lack of political and public
support
• Under-developed procurement
policy
• Ad hoc approach to market
• Infrastructure propositions
not commercially viable;
thus unable to attract
private finance solution
• Reliance on attracting foreign
investment and investors
• Lack of transaction capacity
and know-how
• Failure to recognize the wider
benefits and risk transfer that
can be achieved by involving
private finance
• Uncompetitive private finance
proposals
Capitalizing on Private Finance
Part 1: Laying the Foundation
Requirements for
Private Finance
• Create political, legal, and
financial environments that are
conducive to private finance
(Texas P3 roads, Lekki Toll Road,
Highway 407)
• Involve all stakeholders,
including the public users, in
the development and planning
phases
• Develop objective financial
forecasts and practical debt
repayment schedules (Cross
City Tunnel, Mexico toll roads)
• Analyze tradeoffs among
commercial, contractual and
financing approaches (Chicago
Skyway, Chilean PPP program)
• Determine the meaning and
impact of failure and establish
how to mitigate and manage
such risks (Delhi International
Airport)
Part 2: Building the Structure
Developing the Market for Private
Finance
• Attract private finance
with a program of prioritized
investment opportunities
(India’s PPPs, Portuguese SCUT
roads program)
• Identify what is commercially
achievable (Port of Miami
Tunnel)
• Increase collaboration
between public and private
parties (Florida I-595, Seagirt
Marine Terminal, Australia’s
Future Fund, Canada Line)
• Build and sustain transaction
capacity (PPP Canada,
Partnerships BC)
• Leverage the financing
and transactional skills of
multilateral institutions
(Doraleh Port)
Part 3: Planning for the Future
The Way Forward for
Private Finance
• Sustain the involvement of
existing sources of private
finance (UK Treasury
Infrastructure Finance Unit,
TIFIA funding)
• Stimulate long-term capital
markets
• Respond to changes in the
infrastructure finance offering
as investor appetite, sectoral
and geographic focus change
• Explore the development of
new sources of private finance
(Viability Gap Funding,
BRISConnections)
• Propose new ways to increase
the involvement of private
finance in the infrastructure
sector (IFC Crisis Facility)
DEVELOPED OR
SUCCESSFUL USE OF
PRIVATE FINANCE
Market Characteristics
• Strong and transparent
political and legal frameworks
• Established program of
opportunities
• Close collaboration between
public and private parties
• Strong support from all
stakeholders
• Continuous innovation in
procurement approaches
• Developed local or regional
financial capacity
• Ability to attract new sources
of finance markets
• Improved transaction capacity
and ability to sustain it
Part 1
Laying the Foundation:
Requirements for Success

CHAPTER 1.1
Defining and Measuring the
Private Finance Opportunity
1.1: Defining and Measuring the Private Finance Opportunity
High on the agenda of governments around the world is
the desire to develop their country’s infrastructure. Hand
in hand with this desire is the challenge of deciding how
best to fund this development: determining what is
affordable through the public purse and what contribu-
tion private finance might make. The working premise
is that demand will always outstrip what governments
can afford. Hence, there will always be a role for private
finance to help bridge this financing gap—indeed, there
are already many infrastructure developments that are
privately financed.
Before exploring in detail the challenges and
opportunities of involving private finance, this chapter
gives some background to the subject, namely:
• the definition of infrastructure
• the drivers of demand for infrastructure
• the investment need
• the impact of current fiscal stimulus programs
• existing investment by private finance
It is important to incorporate a financing perspective in
defining the term infrastructure
The headlines have often made little distinction between
the different types or categories of infrastructure and
what may or may not be appropriate for private fund- 3
ing. The term infrastructure can mean different things to
different people and communities. Indeed, even among
infrastructure finance practitioners there has often been
little consistency in terminology. These inconsistencies
make it difficult to comment on what projects or
opportunities might be appropriate for private funding.
They also make it difficult to determine the different
sorts of private finance available; the different approaches
that can be taken to procure, structure, and fund proj-
ects; and how these may change over time. In this Report
we attempt to set out some clear and straightforward
descriptions of different types of infrastructure projects.
From a financing perspective, any definition needs to
take into account both the money flows into and the risk-
and-reward nature of infrastructure. This means that any
definition will need to capture the fact that infrastructure
opportunities are usually capital-intensive and include a
tangible asset that must be operated and maintained and
that will generate stable long-term cash flows.
There are four key elements that define the type of
infrastructure opportunity
We have identified four main elements that will help
describe the type of opportunity in more detail:
1. the type of project or enterprise,
2. the contractual approach,
3. the phase of asset development, and
4. the stage of development of the market.
1.1: Defining and Measuring the Private Finance Opportunity
1. Type of project or enterprise
There appears to be some market consensus on the
existence of two types of infrastructure projects:
• Social infrastructure: These projects involve the
building and/or operation of infrastructure assets to
support the provision of public services. Typically,
public authorities will continue to pay for this
infrastructure. Examples include health facilities,
schools, housing, and prisons.
• Economic infrastructure: These projects support
economic growth by providing and operating infra-
structure needed for a country or region to func-
tion. This kind of infrastructure often has monopo-
listic characteristics and/or may be subject to price
regulation. Often individual users will pay directly
for such infrastructure. Examples include transport
facilities, utilities (water, gas, and electricity), and
telecommunication networks.
Some groups of projects could be described as
“commercial infrastructure.” Examples are projects that
meet the high-level definition of being capital-intensive
and generating long-term cash flows. However, these
projects are open to commercial competition or may be
4 speculative in terms of pricing. Examples of such projects
are cable networks and satellites. For the purposes of this
Report, we consider these groups of projects to be a sub-
set of the economic infrastructure category rather than
a separate grouping.
Another way to assess the type of infrastructure is
to consider the source of revenue that will pay for it. In
essence, there are two sources: (1) public funding
through national taxation and (2) direct user charges.
The two ends of the spectrum of payment sources show
how these sources might point to distinct categories of
social and economic infrastructure. In between there
may be various types of subsidies, such as viability gap
funding (see Case in Point 3 in Chapter 3.6). The level
of reliance on public-sector support or subsidy will have
an impact on the government or public authority’s
choice of contract and financing approach.
2. Contractual approach
The type of project is only half the story; sitting along-
side these different types of projects are broad categories
of contractual approach. We have identified the follow-
ing four approaches:
• Partnership: A partnership is a contractual approach
where both the public and private parties have a
shared interest in the risks and benefits of a project.
• Concession: A concession is a contractual approach
where a public party, usually the state, gives a third
party the right to use or develop land or property
for a specific purpose and period.
• License: A license is given where a party, usually the
state, gives a third party the right to own or use
something.
• Privatization: Privatization refers to the transfer of
assets and/or operations from the public sector to
private ownership and management. In many cir-
cumstances in parallel with the privatization
process, the state will put in place a regulatory
framework to control things such as prices and
minimum service standards.
3. Phase or stage of asset development
Two phrases that have come into common usage to dis-
cuss stages of asset development are:
• Greenfield projects: These are projects that
involve the construction or development of new
infrastructure assets.
• Brownfield projects: These are projects that
involve the operation of an existing infrastructure
asset with a recognizable revenue stream.
A more meaningful description of the stage of
development of an asset could reflect the risks inherent
in the proposition, for example:
• New and innovative: An asset or project is
described as new and innovative infrastructure if it
uses untested technology or construction/operation
methods. An example of a new and innovative
project is a carbon capture infrastructure project.
• New and tested: New and tested infrastructure uses
tried and tested technology and construction meth-
ods in a new facility or project.
• Existing and established: Infrastructure where
the asset already exists and there is a track record of
its performance and usage is described as existing
and established.
As with all of these definitions, there can be variations
on a theme. For example, existing projects may involve a
certain amount of asset renovation or extension, but the
key is to identify the predominant characteristic.
4. Market stage: Developed vs. undeveloped
Private financiers are no different from other investors
in that they will always consider the risk-reward trade-
off of any opportunity. Part of the risk-reward equation
will be how developed the market is for the transaction.
This will take into account many factors, including the
 1.1: Defining and Measuring the Private Finance Opportunity
Figure 1: Parameters for defining infrastructure

Infrastructure asset

• Long term
• Cash generative
• Capital-intensive

Type of project Contractual approach Phase of asset development Stage of development at market

• Economic • Privatization • Existing and established • Undeveloped

• Social • License • New and tested • Developing
• Concession • New and innovative • Developed
• Partnership

technology required, the revenue sources, and the
approach and type of project. But the outcomes can
often be very country-specific. For example, the public-
private partnership approach is mature and developed in
countries such as the United Kingdom and Australia.
However, this approach is still in its formative stages in
the United States. Figure 1 summarizes the four ele-
ments of dynamic infrastructure opportunities: type,
approach, phase, and market.
Overall, the definition of an individual infrastructure
opportunity needs to draw on all four components in
order to give a meaningful description. For example, a
partnership for a new social infrastructure project in a
developed market is very different from the privatization
of an established economic project in an undeveloped
market. These differences will attract or deter different
sources of private finance.
It is worth noting that, within these general
descriptions, the market has created a whole variety
of subcategories. The creation of subcategories is most
prevalent when seeking to describe the contractual
approaches: for example, the role of the private sector
in concession-type contracts can vary significantly
depending on factors such as whether the conces-
sionaires themselves are responsible for the design,
operation, or finance of the project. Appendix A.5 has a
more detailed description of the variety of contractual
approaches and associated acronyms.
5
Demand encompasses renewal of existing and
development of new infrastructure
The need for infrastructure varies greatly across the
world and is likely to be driven by one of the following
factors:
• renewal and upgrade of existing infrastructure:
for example, replacing old bridges, expanding
sewage systems.
• expansion of existing infrastructure: for example,
building a telecommunications network.
• development of new infrastructure: for example,
developing a renewable energy infrastructure.
A number of socioeconomic factors also influence
infrastructure needs. For example, China is forecast to be
the world’s largest car market by 2017, while India is
expected to be the third largest by 2030. As a result, there
will be increased car ownership in both countries; this
will directly influence investment trends by encouraging
the development and improvement of road networks.
In a recent survey, 33 percent of CEOs from
around the globe indicated that they are worried that
inadequate basic infrastructure—for example water,
electricity, and transport—could prove a threat to GDP
growth.1 This represents an increase of 25 percent over
the year before.
1.1: Defining and Measuring the Private Finance Opportunity
Table 1: Average annual world expenditure on infrastructure: Forecast and percentage of world GDP
2000–10 Approximate %
Type of Infrastructure (US$ billion) of world GDP
Road 220 0.38
Rail 49 0.09
Telecommunications 654 1.14
Electricity 127 0.22
Water 576 1.01
TOTAL 1,626 2.84
Source: OECD, 2006.
Note: Telecommunications estimates apply to 2005, 2015, and 2025; electricity refers to transmission and distribution only; water estimates apply to 2005, 2015, and
2025 only, and only to OECD countries, Russia, China, India, and Brazil.
Before considering what sources of financing are
available, what governments can afford, and what can
and should be privately financed, it is useful to under-
stand the need for infrastructure more clearly.
Estimates of infrastructure need range as high as
US$3 trillion per annum
One of the challenges in trying to establish a need for
infrastructure investment is that such a need can be hid-
den, coming to the forefront of public debate only
6
when there is a crisis or catastrophe—such as the col-
lapse of the bridge over the Mississippi River in 2007—
that highlights the need for either the renewal of exist-
ing infrastructure or the construction of new.
It is difficult to put a precise number on the scale
of investment needed in infrastructure, but a review of a
range of reference points provides a sense of the scale of
the challenge. Recent work by the Organisation for
Economic Co-operation and Development (OECD)
and the World Bank provides useful context here:
In 2006, the OECD published a report entitled
Infrastructure to 2030: Telecom, Land Transport, Water and
Electricity, which includes their forecast on average annu-
al world expenditure on these five infrastructure sec-
tors.2 Overall this report estimated that the global annu-
al investment for these sectors will average 2.5 percent
of global GDP—which is currently approximately
US$1.5 trillion, based on a current global GDP of
US$58.1 trillion.3 Table 1 summarizes the findings of
the OECD.
The OECD’s forecast of expenditures across the
five sectors they reviewed is summarized in Figure 2.
This shows the greatest need to be investment in water
infrastructure. Investment in telecommunications infra-
structure is expected to drop significantly by 2020.
These estimates do not include all types of infra-
structure; the OECD estimates that including electricity
generation may add a further 1 percent of global GDP
to the bill. Other transport infrastructure such as ports
2010–20 Approximate % 2020–30 Approximate %
(US$ billion) of world GDP (US$ billion) of world GDP
245 0.32 292 0.29
54 0.07 58 0.06
646 0.85 171 0.17
180 0.24 241 0.24
772 1.01 1,037 1.03
1,897 2.58 1,799 1.79
and airports, and social infrastructure projects such as
schools and hospitals, will increase this amount further.
The OECD’s report highlighted the unevenness of
this predicted spending between the OECD countries
and the rest of the world.4 For example, they predict
that for the road and rail sector, approximately two-
thirds of the expenditure will take place in OECD
countries. In the energy sector, the proportion is
approximately 40 percent.
In summary, the OECD analysis indicates that
expenditure on telecommunications, land transport,
water, and electricity (generation and transmission) will
be 3.5 percent of global GDP per annum, or at least
US$2 trillion per annum in 2009 prices. Including all
types of infrastructure will increase this number further.
Since the OECD’s work for this report was completed
before the global financial crisis, the extent to which the
current recession will affect their forecast is uncertain.
The World Bank estimates that the core needs of
developing countries amount to 7 to 9 percent of their
GDP per annum, or approximately US$400 billion.5
Historically, however, less than half of this amount has
been invested in infrastructure development and mainte-
nance, leaving a financing gap of 3.5 to 4.5 percent.
Even this estimate is partial and does not include
electricity transmission, waste-water treatment, urban
transport, ports, airports, and oil and gas. If these are
included in the estimate, then the annual investment
need could be more than US$900 billion or close to 20
percent of the GDP of developing countries.
Basing an estimate on these two reports, the invest-
ment need could be around US$3 trillion per annum
globally (or close to 5 percent of current global GDP),
of which approximately US$1 trillion per annum needs
to be spent in developing countries.
Current spending on infrastructure is well below this
US$3 trillion threshold, even when considering fiscal
stimulus
Just as it is challenging to estimate the investment need
globally, it is challenging to establish what is actually
 1.1: Defining and Measuring the Private Finance Opportunity
Figure 2: Average annual worldwide infrastructure expenditure forecasts

1,200 ■ Road
■ Rail
■ Telecommunications
1,000 ■ Electricity
■ Water
800
US$ billions

600

400

200

0
2000–10 2010–20 2020–30

Source: Based on OECD data from OECD (2006), Infrastructure to 2030: Telecom, Land Transport, Water and Electricity, p. 29.

7
being spent. Table 2 shows current infrastructure spend- Private finance can help bridge an estimated US$2
ing levels in a range of countries, primarily emerging trillion per annum financing gap
economies, and provides a sense of how much infra- Having identified the annual investment need to be
structure investment will need to increase in order to around 5 percent of global GDP, or US$3 trillion
meet the notional 5 percent of GDP target. (which is significantly above historical levels of spending
in many countries), the expectation is that governments
will not be able to fund all infrastructure from the pub-
Table 2: Current infrastructure spending levels in lic purse without a fundamental shift in budget priori-
selected countries ties and/or an increase in taxation. So there is a gap
Amount Percent between funds available and funds needed—what we
Country (US$ billions) Period GDP*
refer to as the financing gap. As it seems unlikely that
Argentina 20.7 2009–March 2010 3.7 governments are going to be able to, or indeed want to,
Brazil 212.6 2007–March 2010 3.5
Indonesia 9.2 2009–March 2010 0.9
fund their investment need in infrastructure alone, the
Malaysia 2.0 2009–March 2010 0.5 question is: What role can private finance play?
Mexico 200.0 2008–13 2.7 Private finance is not new to infrastructure invest-
South Africa 60.0 2009–11 4.1
ment; it has a long history of contributing to help
Source: Foreign Affairs and International Trade Canada, 2009. bridge this financing gap. The World Bank’s Public
Note: Information about budgetary provisions for infrastructure has been
adjusted to give an annualized number. Private Infrastructure Advisory Facility estimates that
* Annualized GDP number.
private participation in infrastructure in low- and mid-
dle-income countries has averaged 1 percent of national
GDP since 2003.7 Figure 4 illustrates trends in private
Although the headlines might lead to the conclusion
infrastructure investment in developing countries from
that the fiscal stimulus amounts to a transformational
1990 to 2008.
quantity of additional expenditure, analysis undertaken
In many developed economies, private finance has
by the International Monetary Fund (IMF) indicates
been making an increasingly significant contribution to
that the additional budget funding allocated to infra-
infrastructure development, in particular social infra-
structure projects in the two-year period of 2009–10
structure, through public-private partnership (PPP)–type
remains a small percentage of GDP. In many countries,
transactions. For example, in the United Kingdom—
the fiscal stimulus provides an additional allocation for
which has one of the most highly developed PPP pro-
only one year. This is illustrated in Figure 3.
grams—the government estimates that over UK£100
1.1: Defining and Measuring the Private Finance Opportunity

Figure 3: Budget allocations for infrastructure projects, 2009–10

3.0 ■ Fiscal stimulus packages, total

■ Infrastructure

2.5
Percentage of GDP in the country/region

2.0

1.5

1.0

0.5

0.0
2009 2010 2009 2010 2009 2010 2009 2010 2009 2010
United States Euro area Japan Asia (ex Japan) Remaining G-20

Source: IMF, 2009.

Figure 4: Investment commitments to infrastructure projects with private participation in developing countries,
by investment type (1990–2008)

200 ■ Investment in physical assets 400

■ Payments to the government
● New projects

150 300
New projects
US$ billions

100 200

50 100

0 0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Source: World Bank, 2008, slide 7.

 1.1: Defining and Measuring the Private Finance Opportunity
Figure 5: Gap between need and private investment in Notes
infrastructure 1 PricewaterhouseCoopers 2010.

2 OECD 2006. The OECD splits land transport into two sectors in
this report, which is why we refer to “five” sectors here.

3 CIA 2010.
3.0

2.5

2.0
US$ trillions

Annual
need for
investment in
infrastructure

$3 trillion
5 Gap between
investment need
and private
investment
4 The OECD countries are Australia, Austria, Belgium, Canada,
Chile, the Czech Republic, Denmark, Finland, France, Germany,
Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea,
Luxembourg, Mexico, the Netherlands, New Zealand, Norway,
Poland, Portugal, Slovak Republic, Spain, Sweden, Switzerland,
Turkey, the United Kingdom, and the United States.

5 World Bank Group 2008.

6 US DOT 2010.
1.5 $2 trillion
7 World Bank 2008.

8 HM Treasury 2009.
1.0
Private 9 HM Treasury 2006.
investment in
infrastructure 10 Ernst & Young 2007.
0.5

$1 trillion
0.0
References
CIA (Central Intelligence Agency). 2010. The World Fact Book. Available
at https://www.cia.gov/library/publications/the-world-factbook/
(accessed April 19).

Ernst & Young. 2007. “Investing in Global Infrastructure 2007: An

Emerging Asset Class.” Available at http://www.ey.com/
infrastructure.

Foreign Affairs and International Trade Canada. 2009. Worldwide

Inventory of Infrastructure Spending Plans. CANADEXPORT.
January 21. Available at http://www.international.gc.ca/ 9
canadexport/articles/90121h.aspx

HM Treasury. 2006. “PFI: Strengthening Long-Term Partnerships.”

billion in private-sector investment has been made in
infrastructure in the last 10 years.8 To put this into con-
text, private-sector investment in social infrastructure
PPPs represents 10 to 15 percent of the United
Kingdom’s total investment in public services in
2005–06.9
Overall, an estimate made by Ernst & Young in
2007 suggested that global private investment in infra-
structure was around US$1 trillion.10
If it is estimated that investment need is around
US$3 trillion per annum globally, and private invest-
March 22. Available at http://www.hm-treasury.gov.uk/
pfi_strengthening_long-term_partnerships.htm.
———. 2009. “Securing the Recovery: Growth and Opportunity.” Pre-
Budget Report presented to Parliament by the Chancellor of the
Exchequer by Command of Her Majesty, December 9. Command
Paper CM 7747. London: HM Treasury.
IMF (International Monetary Fund). 2009. “The Case for Global Fiscal
Stimulus.” IMF Staff Position Note. March 6. Washington, DC:
IMF.
OECD (Organisation for Economic Co-operation and Development).
2006. Infrastructure to 2030: Telecom, Land Transport, Water and
Electricity. Paris: OECD.
Preqin. 2009. The 2009 Preqin Infrastructure Review. London: Preqin Ltd.

ment in infrastructure is around US$1 trillion, then the
financing gap is in the region of US$2 trillion per
annum if private investment remains constant. This is
illustrated in Figure 5.
By providing a factual description of the private
finance markets (for more information, see Appendix A),
this Report seeks to provide some context to the debate
about what the future may hold for infrastructure
finance in filling this financing gap. Through a dialogue
with a number of parties closely involved with infra-
structure (such as procurers, enablers, and providers of
private finance), we also articulate some of the chal-
lenges and opportunities to maximize the role of private
finance in the future.
PricewaterhouseCoopers LLP. 2010. 13th Annual Global CEO Survey.
US DOT (United States Department of Transportation). 2010.
Press Release No 18-10, January 28. Available at
http://www.dot.state.il.us/stimulus/US%20DOT%20PR.pdf.
World Bank. 2008. "PPI in Developing Countries Easy-to-Use Graphs
on the 2008 Global Update of the PPI Project Database." Public
Private Infrastructure Advisory Facility. Available at
http://ppi.worldbank.org/.
World Bank Group. 2008. Sustainable Infrastructure Action Plan FY
2009-2011. July. Available at http://siteresources.worldbank.org/
INTSDNETWORK/Resources/SIAP-Final-July08.pdf.
 1.2: The Approach to Private Finance for Critical Infrastructure
CHAPTER 1.2 One of the first observations to make about the infra-
structure market is that it might not necessarily be the
size of the infrastructure that makes it significant, but
The Approach to Private rather its criticality for socioeconomic development or
national security. The types of infrastructure that might
Finance for Critical fall into this category include flood barriers; electricity
generation, including nuclear power; water supply; and
Infrastructure mass transit. The impact of such asset failure can mean
different things in different countries or regions and will
depend on the reliance of users on the infrastructure
and the availability of alternatives. For example, in some
countries the failure of water pumping stations might
completely eliminate access to any clean water for a
considerable time; in other countries, such a failure
might result in a short-term reliance on bottled water.
Therefore, essential infrastructure consists of those assets
that are either monopolistic or safety critical—assets that
are too important to fail. This feature of infrastructure
impacts the choice and structure of financing.

Failure can manifest itself as an erosion of service or

a complete shutdown
Is it actually relevant to think about infrastructure “fail-
ing”? In many instances—such as the blackout that
occurred in much of Northeastern United States in
2003—the infrastructure still exists, but it is not working 11
in a reliable or sustainable way, or is poorly maintained.
However, there are two circumstances in which infra-
structure might be described as having “failed”—when
there has been a gradual erosion of service or state of
repair, and when there has been a sudden and complete
failure that may or may not have resulted in a complete
loss. This distinction is important because, in the former
instance, the infrastructure remains in existence and the
concern is potentially more about its ownership and
associated financing. In the latter circumstance, when
there has been a sudden and complete failure, the concern
might be more about the ability to react to failure and,
if there has been a total loss, the obligations and financ-
ing of replacement infrastructure. These are considera-
tions regardless of whether the infrastructure is publicly
or privately financed.

For critical infrastructure, the robustness and

sustainability of financing and the strength of the
regulatory and bankruptcy regimes are important
Besides the potential social and economic impact of
infrastructure that fails or collapses, governments have
to factor in several considerations when deciding how
to finance an asset. Whether the infrastructure is to be
publicly or privately financed, four main factors are:

• the robustness of the financing structure,

• the sustainability of the financing,

1.2: The Approach to Private Finance for Critical Infrastructure

Table 1: Factors determining the viability of a financing decision

Issue Concern Impact

All or a proportion of refinancing
amount is not available
• Capacity issues with market
• Concern from lenders with resulting leverage
of the borrower
• Concern from lenders about the covenant of the
borrower
• If the existing facilities default without a
refinancing, then the shareholders may need to
invest more equity to make up the shortfall or
consider selling the opportunity or transferring
ownership back to the public sector.

Cost of financing available
is higher than anticipated
• General market increase in financing costs
• Concern with borrower’s performance track record
• Concern with the covenant of the borrower
• Shareholders may need to accept a reduction
in their dividends.
• The business may no longer be economically
viable and the shareholders may consider selling
the opportunity or transferring ownership back to
the public sector.

Conditions of financing available • General tightening of terms • Shareholders will need to consider the impact of
are more onerous than anticipated • Concerns with borrower’s track record and/or covenant the conditions on the operation of the
infrastructure and their interest in the company.

• the regulatory regime of the industry, and
• the bankruptcy regime—what happens when either
the owner or the asset goes bankrupt.
12 1. Robustness of the financing structure
As for any business, it is necessary to model “worst case”
scenarios—including reduced revenue or increased
operational costs—to determine how well the business
can withstand adversity before service delivery is affect-
ed. The point at which investor returns begin to be
materially eroded and there are shortfalls of cash to
make debt payments needs to be clearly understood as
well. Whether costs (such as debt costs) are largely fixed
or can be varied to match or reflect demand will have a
considerable impact on the viability of a project.
The use of leverage must be appropriate to the level
of risk that sits with the owners/operators. For example,
the use of a highly leveraged structure for a new toll
road is probably unsuitable given uncertainty around the
level of traffic. A toll road operator with very high debt
repayments and traffic that falls below expectations will
soon be insolvent.
There is a tradeoff between the robustness of the
financing and the level of fees or charges for the infra-
structure. This tradeoff is particularly pertinent for public
authorities letting concession-type contracts and will
influence whether the contract is awarded on the lowest
overall cost only or looks at the robustness of the
financing supporting it.
2. Sustainability of the financing
Because of the long-term nature of infrastructure, the
sustainability of financing over the long term must also
be considered. This does not necessarily mean that the
only possible approach is to have finance in place for the
full term of the asset or contract—such an approach
may be practically impossible or not the most appropri-
ate or efficient. Rather what is needed is a determina-
tion of the threats to and consequences of changes to
the financing during the asset or contract life.
For example, are there known refinancing events,
and if so, where do the risks of failing to complete such
a financing lie? Table 1 presents a summary of issues that
might be relevant here.
Governments must look at the robustness of the
refinanced structure or whether the refinance has been
an opportunity to extract material profits. They should
also determine if they have an obligation to maintain
financing, and in the event of failure, if the government
will become the lender of last resort.
3. Regulatory regime
The regulatory regime might be either the framework
governing a sector, such as airports, or the requirements
set out in an individual contract. Whatever the regime, a
balance must be struck between promoting private
finance and ensuring the operational security or safety
required.
4. Bankruptcy regime and ultimate ownership
In the context of the bankruptcy regime, ultimate owner-
ship is about what happens on failure of a privately
owned/operated asset. For example, is the government’s
preference to find a new private-sector owner/operator
through a trade sale, or is the desire to have contractual
provisions that take it back into public-sector owner-
ship?
One important factor connected with ultimate
ownership is that of “step-in rights.” In many circum-
stances, the debt providers will want to retain a right,
but not an obligation, to attempt to restore or work out
 1.2: The Approach to Private Finance for Critical Infrastructure
Figure 2: Investment commitments to energy projects with private participation in developing countries,
by type of public and private involvement (1990–2008)

60

50

40
US$ billions

30

20

10

0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

■ Concessions ■ Divestitures ■ Greenfield projects

Source: World Bank and PPIAF, 2008, slide 16.

13

a failed project by stepping into the rights and responsi-
bilities of the private-sector entity. This can happen only
in limited circumstances, such as the bankruptcy of the
private-sector entity; when step-in rights are invoked,
the equity investors and shareholders are no longer party
to the transaction.
Public-sector parties concerned about continuity of
service delivery may want to have the ability to main-
tain the contracts and arrangements the private-sector
party has established with some project parties should
the private-sector entity fail for some reason.
There is currently little consistency in the financing of
critical infrastructure
Around the world are examples of infrastructure that
can be deemed too important to fail; it is tempting to
look for lessons to be learned from the finance
approaches taken to fund these projects. Sadly, there is
little consistency of approach. For example, each of the
four countries of the United Kingdom has a different
approach to the water sector.
Much of the electricity generation across the globe
is developed, financed, and operated by private parties
whether through privatization or concession-type
arrangements, as illustrated by Figures 2 and 3.
Approaches to the infrastructure required for generating
electricity range from the generation being part of an
integrated energy company that interfaces directly with
retail and corporate consumers to single merchant power
companies that sell electricity to the grid operator.
Much of mass transit is publicly owned. For example,
Delhi Metro is a joint venture between the Government
of India and the Government of National Capital
Territory of Delhi. Other mass transit ventures are pri-
vately owned, such as Singapore’s multimodel transport
provider (SMRT), which is listed on the Singapore
Stock Exchange with Temasek (the Singapore govern-
ment’s sovereign wealth fund) owning 54 percent of the
company. Some mass transit endeavors are public-private
partnerships, albeit with very mixed success. For exam-
ple, London Underground’s infrastructure network was
operated under a public-private partnership contract but
is now back in public ownership.
Airports exhibit a whole range of approaches from
publicly owned and operated to fully privatized. Delhi
Airport provides a good example of a partnership
approach between the government and the private sector
(see Case Study 1: Delhi International Airport Limited).
1.2: The Approach to Private Finance for Critical Infrastructure

Figure 3: Investment commitments to electricity projects with private participation in developing countries,
by segment (1990–2008)

60 150

50 125

40 100

New projects
US$ billions

30 75

20 50

10 25

0
0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

■ Distribution ■ Generation ■ Integrated utilities ■ Transmission ● New projects

Source: World Bank and PPIAF, 2008, slide 26.

14

Reference
“The private sector can successfully World Bank and PPIAF (Public-Private Infrastructure Advisory Facility).
partner with the public sector to develop 2008. “PPI in Developing Countries.” PPI Project Database.
Washington, DC: International Bank for Reconstruction and
infrastructure projects.” Development, The World Bank.

— Robert Dove, Managing Director, Infrastructure,

The Carlyle Group

Private finance is a viable option for critical

infrastructure as long as the implications of failure are
considered
Failure can mean different things. It is rarely about the
catastrophic collapse of the infrastructure but more
about commercial failure, poor service, and unreliability.
There are a number of factors that affect the financing
choice and contractual obligations for such infrastruc-
ture, especially if it is to be privately financed. But the
range of approaches taken across the world would indi-
cate that infrastructure seen as too important to fail does
not preclude the use of private finance. There are many
examples where the private financing of critical infra-
structure is very successful.
 1.3: Accomodating the Long-Term Nature of Infrastructure
CHAPTER 1.3 More than 20 percent of London’s main water pipes
are over 150 years old; the median age of coal power
stations in the United States is over 40 years; and some
Accomodating the Long-Term of the major metro systems, such as Moscow’s, are more
than 70 years old. If the infrastructure asset will last for
Nature of Infrastructure many years, what impact does this have on the use of
private finance to fund it, in whole or in part?
There are many often interlinking factors that feed
in to the final decision on the choice of financing. We
will focus on two key ones, namely:

• certainty vs. flexibility of asset functionality, and

• the ability to forecast costs and revenue over the

long term.

As these issues are most pertinent in concession-

based contracts, we will also touch on the question of
how long the concession should be in effect.

There is a tradeoff between the need for contract

certainty and the future flexibility of asset functionality
The tradeoff between contract certainty and flexibility
means that very early in the planning stage public
authorities need to decide whether to retain risks result-
ing from future changes to the situation or to attempt 15
to pass some or all of that risk to a private party. Indeed,
they must consider whether or not the public party is
even willing to accept the risk and, if they are willing,
to accept its potential cost. For instance, hospitals might
be completely privately operated and funded with the
private sector taking on all the risk of the appropriate-
ness of the facilities and usage, in the same way that any
private company takes on the risk of any venture. At the
other end of the spectrum, the public sector may want
to retain long-term ownership and usage, and instead let
to a concession that defines the current functionality
needed. In this circumstance, the public authority retains
the risk and cost of future change, although it may seek
to put in place methods needed to make changes—
either minor or major—as they wish.
As a rule of thumb, the greater the risk and cost
of change that is passed to the private sector, the more
conservative the funding structures (term, leverage,
pricing, etc.) from the banks will be. Equity investors
will seek higher returns for the additional risk they
consider they are taking on.

Forecasting costs and revenue over the long term is

difficult, but vital for the success of the project
Many businesses struggle to forecast revenue and costs
over the short term, yet, for many infrastructure transac-
tions, there is a need to forecast these over the long term,
sometimes for more than 50 years. How is this possible
and what are the consequences of getting it wrong?
1.3: Accomodating the Long-Term Nature of Infrastructure
A key to the reliability of long-term forecasting
is the extent to which there is an ability to fix both
revenue and costs, including finance costs, over the long
term. For example, many concession-type contracts
will fix the payments to the concessionaires if they
achieve the required functionality and/or operational
performance, or if revenue from some economic infra-
structure can be fixed over the long-term. The conces-
sionaire may be able to negotiate long-term subcon-
tracts—for example, for asset operation and maintenance
over the concession period.
Basing contracts on fixed costs (especially operational
costs with a high fixed element) can attract a premium
because the operator is being asked to forecast his per-
formance and costs over the long term but has no one
to pass those costs on to in the event those costs differ
from the original forecast. There are ways around this,
however; the most common is to build in periodic
reviews of costs and adjust the revenue to reflect any
changes revealed in these reviews. The real risk with
this approach, and one that is often overlooked, is that
the long-term counterparty will survive the test of time.
This should be a concern whether it is the public sector,
subcontractors, or even the financial hedge provider
making the payments.
In 2008 significant parts of the world’s financial sys-
16 tem come close to collapse, and it is not unheard of for
public-sector parties to default on payments. For exam-
ple, in 2001 the government of the State of
Maharashtra, India, had to bail out its subsidiary, the
Maharashtra State Electricity Board (MSEB), when
MSEB failed to make payments to the Dabhol Power
Company under a power purchase agreement. It is worth
noting, however, that this non-payment was only part of
a complex set of issues with the Dabhol power project.1
The difficulties that often attract the most contro-
versy are transactions with demand risk; one example is
toll roads that rely on long-term forecasting of both
traffic and toll levels. The only thing that is certain is
that these forecasts will be wrong. In bull markets, there
is a danger that bidding can be biased by optimism, typi-
cally by overestimating traffic forecasts and the way
those will grow over the concession period. It is common
for traffic growth to be linked to GDP growth and for
forecasts to assume year-on-year constant growth, but
there is growing evidence, particularly in developed
economies, that the linkage between traffic growth and
GDP is being lost as people change their travel habits. It
is necessary to be realistic about the level of tolls that
users will be willing to pay and the alternative routes
they may have. For example, when the Cross City
Tunnel project in Sydney, Australia, was being bid, the
capital costs increased significantly. Consequently, the
forecast toll level was increased to reflect this. Very soon
after the contract was awarded, it became clear that the
tolls were too high and that, as a result, drivers were not
using the tunnel. As a result, within months of opening,
the project company was insolvent (see Case Study 2:
The Cross City Tunnel).
The manner in which the bidding process is struc-
tured and the criteria by which the contract is awarded
can also encourage over-optimism; for example, if the
decision to award the contract rests on the size of the
upfront payment to the public authority, unrealistic
assumptions about the size of that upfront payment can
result. The flip side of over-optimism is overly conserv-
ative forecasts that are exceeded significantly by the
operator, resulting in materially greater returns than
expected. In some circumstances, such overshooting
the expected goal can be an issue for the public sector
(see also the discussion in Chapter 1.5 about public
perception).
It is important to look beyond the life of the asset in
determining the length of a concession
Because many of the factors that influence the final
decision on the choice of financing are most pertinent in
concession-based contracts, a crucial question is “How
long should the concession be?” Concession terms vary
widely across the globe and across sectors; some terms
are for less than 10 years, while others can run for up to
99 years.
There are three factors that should be considered in
setting the concession term:
• Is the opportunity monopolistic or competitive in
nature?
• Is there debt to be repaid during the concession
period?
• Is the level of investor return an issue?
Monopolistic or competitive infrastructure
Many governments will want to retain some degree of
control over monopolistic infrastructure (for many of
the reasons highlighted in Chapter 1.2). They will need
to consider carefully the balance between the length
of the concession and the industry’s regulatory regime
to ensure that users are not faced with unsustainable
price increases and/or deteriorating service. It might
be preferable to let a series of shorter-term concessions
rather than a series of long-term concessions, as hap-
pened with the United Kingdom’s rail franchise. One
of the major drawbacks of short concessions, however,
is that they can limit the appetite and ability of the
concessionaire to make significant capital investment
for many of the reasons outlined below.
Repayment of debt
If the concession requires significant upfront capital
investment funded by wholesale debt, then the conces-
sion length will need to strike a balance between the
 1.3: Accomodating the Long-Term Nature of Infrastructure
Case in Point 1: Mexican toll roads program

Success is not about signing the contract and arranging the non-performing loans estimated at US$4.5 to US$5.5 billion,
finance but is about taking a robust and sustainable approach. concessionaires were forced to write off large portions of their
investments, and toll road users were burdened with very high
tolls. By 1997, the government cancelled 23 of the 53 conces-
Overview
sions, recovering the right to operate, maintain, and exploit
In the period 1989–94, the Mexican government let a series of
these roads while absorbing US$7.3 billion in bank loans and
53 concessions for toll roads. The program more than doubled
short-term borrowings.
the size of the national toll road network and represented a
Building upon these lessons, the Mexican government
combined total investment of US$13 billion in 1994 dollars. But
launched three new programs in 2003 that have resulted in an
the viability of the toll roads was greatly undermined as a result
increase in private investment in road projects.
of miscalculations of investment costs as well as over-opti-
The table below provides a high-level summary of some of
mistic forecasts of operating revenues. This situation was wors-
the issues encountered in the earlier program and how they
ened by the 1994 Mexican currency crisis, which essentially
have been addressed in the current program.
stalled the toll road program: commercial banks were left with

1989–94 program approach

Concession length The government awarded short-term 15-year concessions; this initially drove up tolls, leading to adverse user behavior
as drivers simply avoided the toll roads. Subsequently these concessions were extended to 30 years.

Design and construction costs Among the main factors that affected the viability of the program were the frequent cost overruns and construction
delays. Information deficiencies, problems with securing rights of way, unanticipated design changes, and local com-
munity resistance, among others, resulted in an increase in the average cost per kilometer of new highway from
US$1.7 million (the original estimate) to US$2.6–2.8 million.

Usage and revenue forecasting
Financial structure
Traffic shortfalls and higher-than-expected operations and maintenance expenditures caused the actual project rev-
enues to be, on average, 30 percent below the original estimates. There were also free competing roads, which
affected traffic usage.
17
The financial structure of the projects contributed to their downfall. High debt-to-value ratios in combination with
short-term commercial bank loans characterized by high floating interest rates further hampered the profitability of
the projects.

2003 program revised approach

The New High Concession model In this model, the Ministry of Communications and Transport provides final designs, sets the maximum tenor of the con-
cession to 30 years, sets the tolls, and assigns the concession to the bidder that asks less government contribution or
pays more for the concession.

The Service Contract model (PPS) The Ministry of Communications and Transport assigns a service contract and a concession to a private-sector firm to
design, finance, build, operate, and maintain a highway for a period ranging from 15 to 30 years. The private firm pro-
vides services in exchange for periodic payments based on road availability and traffic levels (shadow toll).

The Asset Utilization model: The Ministry prepares concessions of highways with more than 10 years of continuous operation. The concession-
aires are responsible for operating, maintaining, and collecting toll revenues on the existing toll roads as well as
building and later operating the new highways as outlined in the concession. Many of the opportunities promoted
under this approach are those from the earlier program that are now under government control.

period over which debt is available, the period over
which it is amortized, and the level of fee or user charge.
Of particular concern is the presence of significant
debt to be repaid when the concession period is short.
In that case, the annual finance costs may create prohibi-
tively high user charges. For example, the annual debt
cost of repaying US$100 at a 6 percent interest rate over
15 years is approximately 25 percent higher than the
annual repayment amount over 25 years.2
Mexico’s 1990s toll road program, in which conces-
sions were awarded to the bidder proposing the shortest
concession period highlights this problem. The short
concessions led to very high tolls, resulting in traffic well
below forecast. Ultimately, the majority of the conces-
sions reverted to public ownership (see Case in Point 1:
Mexican toll roads program, which provides more
detailed commentary, including the lessons learned that
were reflected in the more recent 2003 program).
1.3: Accomodating the Long-Term Nature of Infrastructure
Case in Point 2: Chilean private-public partnership roads program
The Chilean public-private partnership (PPP) roads program
was established in order to modernize the country’s road infra-
structure to meet the needs of a growing economy. The program
invited the participation of the private sector in the construction,
maintenance, operation, and financing of these roads. There
were three main aims:
1. to use private-sector expertise to develop and finance
public works,
2. to externalize the construction and operation of the facili-
ties, improving the level of service and security, and
3. to free public resources to focus on projects and
programs with higher social priorities.
Between the early 1990s and early 2000s, Chile awarded,
on a competitive basis, 21 real toll road concessions worth an
estimated US$5 billion. Bidding started with smaller projects in
order to test the market and reduce risk to the private sector.
The bidding attracted 27 consortia from more than 40 Chilean
18
Level of investor return
A concession period that is long enough for investors
to achieve their bid return must, at the same time, not
be so long the investors can make windfall gains. This
can expose the public authority to the criticism that
they “gave away the concession too cheaply.”
One of the challenges to achieving a target or
“acceptable” investor return is that if the forecasts are
based on a number of variables, including the level of
user demand or financing costs—then it is difficult to
know the long-term outcome. This might lead to a
shorter concession period over which forecasting
might be more certain. A longer concession can mean a
significant risk transfer over a long period of time—for
example, if there is demand risk for more than 50 years.
Here it could be argued that if the private party actually
makes higher profits than forecast, that is still acceptable
because they were also willing to accept the risk of no
profit at all, or possibly even capital loss.
There are a number of contractual ways around
this conundrum. For example, the Chilean roads conces-
sion has demand risk, but the period of the concession
can be flexed so it terminates once the investors have
reached their target return (see Case in Point 2: Chilean
private-public partnership roads program). To take
another example, the United Kingdom’s Dartford River
Crossing reverted to government ownership once the
and foreign companies from 10 countries, with financing
arranged through both the domestic and international bank and
bond markets and supported by exchange rate reserves.
Prior to launching the program, the government estab-
lished a dedicated agency to manage the procurement. They
also enacted specific and detailed legislation relating to con-
cessions and put in place a transparent procurement process.
By starting with a number of pilot projects, the government
was able to refine both its bidding process—in particular, its bid
evaluation criteria—and key contract terms. Some of the most
notable changes to the contract terms tried to address some of
the issues relating to predictable and realistic forecasting of
traffic. Different approaches included the government putting a
cap and floor on the level of toll that could be bid; a variable
concession term that adjusts to ensure investors the return they
bid; and the government providing minimum revenue guaran-
tees. Overall, the government wanted to award concessions
that could deliver long-term financial stability and balance the
toll level against the traffic volumes.
The PPP program was transparent and competitive, and is
generally considered a success story.
capital cost was repaid and investors reached their target
return.
Very long term concessions also introduce the issue
of how the market values very long-term returns. When
thinking about how NPV is calculated (see Appendix A.2),
it may be appropriate to consider the timing of different
investment cash flows and to adjust the discount rate
to reflect the changing risk profile over the current,
medium, and long term. The greater difficulty in fore-
casting revenue/costs should also be considered in this
calculation.
“If governments lead and set understandable
frameworks, others will follow.”
— Michael Till, Partner and Co-Head, Infrastructure, Actis
The long life of infrastructure assets means certain
trade-offs must be explicitly addressed accross
commercial, contractual, and financing arrangements
Private finance can be successfully used for long-term
arrangements, but before doing so the procuring
authority needs to think carefully about how the infra-
structure may need to respond to changing conditions.
 1.3: Accomodating the Long-Term Nature of Infrastructure
These considerations are likely to involve some tradeoffs,
such as the level of risk transfer vs. the level of profit,
the certainty of a fixed return vs. the need for flexibility
to accommodate changed circumstances. Concession
length must also be considered.
There is no single correct response to all financing
requirements, and what is appropriate in one situation
might be unacceptable in another. However, none of
the related issues are new and there are examples of
experience across the globe that can help understand
the consequences of certain choices.

Notes
1 Hansen et al. 2005.

2 This analysis is based on a simple calculation that ignores addi-

tional debt costs and assumes a straight line repayment.

References
Cuttaree, V. 2008. Successes and Failures of PPP Projects. Powerpoint
presentation, The World Bank: Europe and Central Asia Region.
Warsaw, June 17. Available at http://siteresources.worldbank.org/
INTECAREGTOPTRANSPORT/Resources/Day1_Pres2_
SuccessesandFailuresPPPprojects15Jun08.ppt.

Hansen, K., R. C. O’Sullivan, and W. G. Anderson. 2005. “The Dabhol

Power Project Settlement: What Happened? And How?”
Infra-structure Journal 3 (December 22). Available at http://
www.chadbourne.com/files/Publication/a5aa1e52-4285-4bb5-
87e6-7201123895a0/Presentation/PublicationAttachment/
19
352f8f09-ae96-40fc-a293-720d0b8f0ca8/Dabhol_
InfrastructureJournal12_2005.pdf (accessed April 21, 2010).

Hodges, J. “PPP Highway Experiences.” Powerpoint presentation,

World Bank.

Lorenzen, C. and M. Barrientos, with S. Babbar. 2001. “Toll Road

Concessions: The Chilean Experience.” PFG Discussion Paper
Series, No. 124. Available at http://siteresources.worldbank.org/
INTGUARANTEES/Resources/TollRoads_Concessions.pdf.

Rachide, M. M., I. Niño, L. Calzada, A. Gómez, and S. B. Smith. 2010.

“Mexican Road Re-privatization: A New Attempt to Attract Private
Investment to the Road Network.” Case prepared under the
supervision of Professor Campbell R. Harvey as the basis for
class discussion. Duke: Fuqua School of Business.

Ruster, J. 1997. “A Retrospective on the Mexican Toll Road Program

(1989–94).” Public Policy for the Private Sector, Note No. 125,
September. Washington, DC: World Bank. Available at
http://rru.worldbank.org/Documents/PublicPolicyJournal/
125ruste.pdf.

CHAPTER 1.4
Navigating the Political, Legal,
and Economic Environment
1.4: Navigating the Political, Legal, and Economic Environment
Uncertainties are events that are indefinite, while risks
apply to events that have a measurable probability.
Uncertainties are often the result of the aims and actions
of third parties, rather than directly related to the infra-
structure being considered. (Please see Appendix A.6
for further discussion of these aspects of risk.) Many of
these uncertain events are linked to the political, legal,
or economic environment, and they are highly relevant
to private finance of infrastructure. Some of the issues to
consider include:
• Is the bidding process in this country transparent
and fair?
• Does the public authority have the power to enter
into the contract?
• Can the public-sector party be brought to court if
they fail to fulfill their contractual obligations?
• Will courts in this country uphold decisions?
• Can the lending be done in the local currency?
• Is the opportunity open to foreign investors?
These are questions that apply to developing, 21
emerging and developed economies. For example, it is
crucial to know when regulatory approaches may be
outdated or flawed, or whether the political support for
the transaction is uncertain. The Texas roads program,
which has been hindered by political indecision, is one
such case (see Case in Point 1: Texas P3 roads program).
Political support and transparency during the
procurement and bidding process is a key factor that
attracts private finance
Strong political support is one of the characteristics of
procurements that have attracted a wide range of bid-
ders, including leading and experienced players.
In the United Kingdom, the public-private partner-
ship (PPP) concept was launched in the early 1990s
with that government’s Private Finance Initiative (PFI),
but the program initially had limited impact. It was not
until 1995–96 that momentum started to build and
contracts began to be signed. There was a widely held
belief that there would be a change of government in
1997 and that the incoming government would not
support the program. However, instead of abandoning
the program, the incoming government commissioned a
review on how to re-invigorate it. The review recom-
mendations included:
• Government departments should set out clear lists
of their projects and establish the priority of those
projects. The private sector was able to see a clear
1.4: Navigating the Political, Legal, and Economic Environment

Case in Point 1: Texas P3 roads program

In Texas laws were passed in 2005 to allow public-private part- companies from collecting tolls and the tolling of existing roads.
nership (P3) type projects with an expectation that this could be While a small number of projects have proceeded, the scale of
applied to a number of roads projects. But within two years the P3 program originally planned has not been achieved.
there was a moratorium enacted, which prevented private

In May 2007, the Texas Legislature

enacted a two-year moratorium on using
PPPs for some current and proposed
projects with the intent of limiting the
private sector from collecting tolls and the
tolling of existing freeways.

Law to implement comprehensive Moratorium on private collection and

development agreements (CDAs) passed, tolling on existing freeways extended to
building on previous laws. September 2010.

2004 2005 2006 2007 2008 2009 2010

22

Road projects
IH 635 Managed Lanes P3 project North Tarrant Express P3 financial close.
reached commercial close. 21.4km tolled highway in Dallas-Fort Worth
(September 2009) region of Texas reached commercial close.
(December 2009)

DFW Connector CDA signed as Compensation agreed for losing the bid
design and build publicly funded. for the SH 121 toll road after it was
(September 2009) conditionally awarded in 2007.
(August 2009)
 1.4: Navigating the Political, Legal, and Economic Environment
pipeline of prioritized opportunities, which cat- Table 1: Advantages and disadvantages of the
alyzed private investment. unsolicited bid approach

• Any impediments to the progress of projects, partic-
ularly legal ones, should be expeditiously resolved.
• Financially and commercially experienced people
were needed to support the public authority project
teams. An existing taskforce was re-focused to help
build up PFI expertise and to start the process of
coordinating the initiative across government
departments and standardizing the procurement
process. Two years later, Partnerships UK (PUK)—
itself a PPP—was formed. PUK’s aim was to pro-
Advantages
An unsolicited bid may offer
solutions not otherwise available—
for example, it may access an
alternative land bank.
The procurement process is
potentially quicker and cheaper.
Disadvantages
The approach may be limited in
application. For example, because
of the extensive land required for
new roads, it may not be feasible for
them to come to market as unsolicited
bids.
The best test for whether a proposal
will give value for money is for there
to be a comparable competing bid.
However, by its nature, an unsolicited
bid will not have the benefit of
competitive bidding.

vide the public sector with the same level of finan-
cial and commercial expertise enjoyed by the pri-
vate sector.
Chapter 2.1, which picks up many of PUK’s
detailed recommendations, focuses on the benefits of
having a program of prioritized opportunities in place.
What is relevant here is that the review was a clear
statement of the new government’s support for the
program and a catalyst for renewed investor and lender
interest. This led to the signing of more than 600 proj-
ects, by September 2009, with a combined capital value
of more than £55 billion.1
There are many examples of strong political
support acting as a catalyst. For example, India currently
has the largest program of PPPs in the world, with its
five-year plan (2007–12) estimating an investment need
of US$492 billion for roads, railways, ports, and power
and water facilities.2 The World Bank is supporting
India’s program with US$1.2 billion of financing.3
Other examples abound: since the 1980s, Malaysia has
completed a number of PPP-based road concessions,4 as
did the Chilean government in the 1990s and Singapore
in 2004.5
Another factor that attracts private finance is a
public, comprehensible and transparent procurement
process to determine which contracts will be awarded. If
the process is perceived as corrupt or designed to give
an advantage to a particular bidder, it will deter others
and ultimately undermine the legitimacy of the process.
The process itself needs to be conducted in a timely
and efficient manner, and bidders will expect the public
authorities to have the ability and capacity to do this. One
significant challenge of India’s current road-building
program (which aims to build 7,000 kilometers a year
over the next five years) is for the public authorities to
have the capacity to handle such a large number of
parallel procurements.
In some countries, not all new infrastructure projects
involving the private sector are subject to a competitive
process and unsolicited bids are accepted. A brief summary
of some of the advantages and disadvantages of an unso-
licited bid approach is provided in Table 1.
An unsolicited bid may be a An unsolicited bid can potentially
route for furthering local projects undermine the creation of coordi-
that are not national priorities. nated, prioritized programs.
An unsolicited bid provides no
assurance that projects will actually
proceed—for example, the unsolicited
bidder can withdraw their offer.
Consideration needs to be given to the availability of
local banking and environment for foreign investment 23
Other important considerations in many markets,
particularly in emerging economies, is what currency to
invest or lend in and the depth of the local banking and
foreign exchange markets. For example, if the revenues
and costs are in the local currency but financing can be
arranged only in a foreign currency, then one party
needs to take the exchange rate risk. If the country lacks
a developed foreign currency market, then this risk
would most likely be taken by the public authority. Yet
wider fiscal policy and regulation on the part of the
government may seek to avoid such risks.
To overcome this vicious circle and its impediment
to private finance, the PPP toll road transaction in Nigeria
that was funded through the local banking markets with
the support of the African Development Bank is an
instance of such an approach (see Case Study 3: Lekki
Toll Road Concession).
The involvement of private finance in infrastruc-
ture can often require a review of general local and
national laws to ensure that they cater to private-sector
involvement, such as the right to private land ownership.
Governments need to be clear about whether they want
to attract foreign private finance and, if they do, whether
they are prepared to make the necessary changes to facil-
itate this. Frequent areas of concern are tax regulations
and repatriation of profit.
1.4: Navigating the Political, Legal, and Economic Environment

Private financiers view the political, legal, References

and economic environment as integral to long-term
contract management
Project success should not be measured by a successful
initial finance raising or contract signature but, given the
Cuttaree, V. 2008. Successes and Failures of PPP Projects. Powerpoint
presentation, The World Bank: Europe and Central Asia Region.
Warsaw, June 17. Available at http://siteresources.worldbank.org/
INTECAREGTOPTRANSPORT/Resources/Day1_Pres2_
SuccessesandFailuresPPPprojects15Jun08.ppt.

long-term nature of the investment (Chapter 1.3), needs
to reflect the long-term contract management as well.
Some of the questions asked by potential investors will
be about how the public authority will act in the
future—for example, whether the public party will
honor its contract obligations and what happens when
things go wrong. A common stipulation in toll road
HMT Treasury website: PFI Signed Projects List September 2009.
Available at http://www.hmt.gov.uk//ppp_pfi_stats.htm.
InfraAmericas. InfraNews articles. Available at
http://www.infra-americas.com.
Ministry of Finance, Singapore. 2004. Public Private Partnership
Handbook: Executive Summary. August 2004. Available at
http://app.mof.gov.sg/data/cmsresource/PPP/Public%20Private%
20Partnership%20Handbook%20Executive%20Summary%20.pdf.

projects is that no competing roads be built for the The State of Texas. 2008. Report of the Legislative Study Committee
on Private Participation in Toll Projects: Final Report. December.
contract term or within a defined period, for instance. Available at ftp://ftp.dot.state.tx.us/pub/txdot-info/library/pubs/
Breaking this obligation, as happened with the Don bus/tta/sb_792_report.pdf.
Muang Tollway in Bangkok,6 can undermine not only TxDOT (Texas Department of Transportation) website: Public-Private
the commercial viability of the project but the participa- Partnerships section: Request for Proposals and SB 792 report.
Available at http://www.txdot.gov/business/partnerships/
tion of the private finance community as a whole. A cda_rfp.htm.
broken or unmet obligation may mean that private US DOT (United States Department of Transportation). 2007. State PPP
financiers may lose interest and confidence in a given Activity Update 2008. Available at http://www.wsdot.wa.gov/NR/
market. rdonlyres/1BA5199B-4ECF-493D-BD77-EDC86152456C/0/
UpdateonStatePPPActivity20082.pdf.
The concern for private financiers is not so much
Ward, J. L. and J. M. Sussman. 2006. “Analysis of the Malaysian Toll
that things might go wrong with the project but rather Road Public-Private Partnership Program and Recommendations
that, if they do go wrong, there is a robust and inde- for Policy Improvements.” Available at http://www.trb-pricing.org/
docs/06-0210.pdf.
pendent judiciary to bring about a fair resolution. A
very good example of this is the Highway 407 ETR World Bank. 2009. “Financing Infrastructure PPP Projects in
India: $1,195 billion.” September 22. Available at
24 real toll road project in Canada (see Case Study 4: http://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/
Ontario Highway 407 toll road), which led to a major SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:22322364~menuPK:
295589~pagePK:2865066~piPK:2865079~theSitePK:
dispute between the public and private parties on the 295584,00.html.
interpretation of part of the contract. Despite the
importance of the dispute, it has followed the legal
process and has undoubtedly given confidence to
future investors in the country.
Uncertainty can also come through the application
of broader regulatory regimes, especially when they
provide for periodic price reviews. For example, in 2009
the United Kingdom’s water industries’ five-year price
review process was highlighted in the press for setting
the targeted return for investors too low and potentially
driving investors from the sector.
Seeking private-sector participation is not a sub-
stitute for developing a country’s institutions. Although
some lenders or investors might be prepared to take
some risks for grossly inflated returns, this attitude will
probably represent poor value for money and gives no
platform on which to build a successful program of
investment. It might work for one project but is not a
sustainable approach.

Notes
1 HMT Treasury website: PFI Signed Projects List September 2009

2 World Bank 2009.

3 World Bank 2009.

4 Ward and Sussman 2006.

5 Ministry of Finance, Singapore, 2004.

6 Cuttaree 2008.
 1.5: Understanding and Managing Public Perceptions
CHAPTER 1.5 Much of this Report has focused on the role of private
finance in developing infrastructure, but—as end users
of infrastructure projects—the public is a critical part
Understanding and Managing of the success of any infrastructure-related enterprise.
For certain types of infrastructure the public is already
Public Perceptions accustomed to the notion that the provision and opera-
tion of infrastructure is in the hands of the private sec-
tor and is happy to have a direct relationship with that
operator. Such is the case with mobile phone networks,
where there is virtually no resistance to the involvement
of private finance. In other cases, however, concern can
be pronounced, especially in the social infrastructure
sector with projects such as roads, bridges, schools, and
railways. This chapter explores the impact of public sen-
timent on the success of private finance and considers
how best to garner public support.
There are five key factors that can influence public
sentiment:

1. who finances the infrastructure,

2. the cost,
3. the level of profit expected and who profits,
4. who delivers the project, and
5. the established approach for the sector.

Whether infrastructure is paid for through general 25

taxation or directly by the user can greatly influence
support
When individuals pay directly for infrastructure, there is
a greater chance of resistance, especially if the quality of
the operations does not seem commensurate with the
cost involved. If the project is paid for through taxation,
the link between the form of payment and the specific
infrastructure is less direct and therefore less likely to be
seen by the public as something to reject.
How infrastructure has been paid for in the past
influences perceptions. For example, in many countries
the power generation industry has a long history of pri-
vate financing. As a result, users have almost no resistance
to paying for this service. Applying a toll to a previously
“free” road, however, can be easily resisted. This resistance
has been one of the impediments to the global shift of
procuring much infrastructure, especially social infra-
structure, using private finance.
The complexity of human behavior is beyond the
scope of this Report, but a great deal of research—such
as Kahneman and Tversky’s Prospect Theory1—has
demonstrated that people value gains and losses differ-
ently even if their choices have the same economic end
result.

Assessments of private-sector approaches must

consider full life-cycle costs and the expected costs of
risks
Much of the public’s concern about private finance
stems from the belief that private finance involvement
1.5: Understanding and Managing Public Perceptions
Figure 1: Illustrative comparative analysis of public and private funding solutions
Planning phase
Transferable
Shared risks
risks
Shared risks
Expected costs
Competitive
neutrality
NPV of
payments
Base costs
Retained risks Retained risks
PSC Shadow bid
Source: PricewaterhouseCoopers, unpublished document, 2010.
Note: PSC is the “Public Sector Comparator” or the public sector cost of delivering a proposed contract . The shadow bid is an estimate of what PPP bids will be.
26
inherently costs more. This perception is likely to be
true if the financing costs are considered apart from
other contract terms such as construction effectiveness,
operational efficiency, and risk transfer. After all, most
governments can fund themselves more cheaply than
commercial enterprises can. However, this assumption
does not factor in the expected cost of the whole con-
tract delivery, including risk transfer. In order to make
an informed comparison of the cost of public and pri-
vate solutions, a comparative analysis (often called a
value-for-money analysis) needs to be completed, which
takes into account all of the costs and the risk transfer.
Figure 1 provides a summary of how this analysis is
developed for both the planning and procurement
phases of a project.
In this analysis, five elements are identified as mak-
ing up the public-sector cost of delivering the proposed
contract (the public-sector comparator or PSC):
• Retained risks: The expected cost of risks retained
by the public sector.
• Base costs: The expected capital and operational
expenditure needed to build and operate the infra-
structure.
• Competitive neutrality: An estimation of the cost
savings of competitive bidding processes.
Procurement phase
Affordability
Transferable
risks
Shared risks
Shared risks Shared risks
Competitive
neutrality
NPV of NPV of
payments payments
Base costs
Retained risks Retained risks Retained risks
PSC PPP Bid #1 PPP Bid #2
• Shared risks: The expected cost of risks shared
between the public and private parties.
• Transferable risks: The expected cost of risk
transferred to the private sector.
Alongside this analysis, the public sector will need
to decide what it can afford. If the PSC is above what it
can afford, then consideration will need to be given to
whether reducing the transferable risk and increasing
the retained risk is possible, or if the benefit of competi-
tion has been underestimated.
Education and transparency about all costs and
rewards associated with different financing options are
critical to assessing those options on a truly comparable
basis. It is essential to present clear and comparable
information to enable the public to reach a balanced
judgment.
Mechanisms such as profit sharing may mitigate
concerns about excessive profits by the private party
The appropriateness of the profit to be made is a partic-
ularly controversial area. This is primarily an issue for
elements of social infrastructure, such as schools and
courts, which are often regarded as a core part of the
public balance sheet, from which no one should profit.
Even if people accept the reality that profits will be
made, there could be a public outcry when most of the
profits are channeled toward the private sector.

Arrangements can be put in place to ensure that
the public authority shares in the future success of a
project; this is the case with the recent transaction for
the Seagirt Marine Terminal (see Case Study 5: Port
of Baltimore, Seagirt Marine Terminal). The extent to
which this factor may or may not be an issue will vary
across geographies, but it should not be overlooked
because private enterprises are, by nature, seeking profits,
and have obligations to their shareholders to do so.
There are a variety of ways to garner public support
Experience from many successful projects and programs
around the world show that there is a wide variety of
approaches that can be considered and actions that can
be undertaken in order to garner public support. These
include:
• the involvement of all stakeholders,
• the perception of a crisis,
• the transformational nature of projects,
• the choice of contract approach, and
• the choice of a public relations (PR) approach.
All stakeholders need to be involved in the procurement
process
It is critical to ensure that all stakeholders, including the
public and end users, are well informed of the approach
to be taken and the decisions made at each step of the
procurement process. Getting a few pathfinder projects
can help, since this allows feedback from all parties on
what worked and what did not, which helps to foster
ownership of the program. The New South Wales gov-
ernment in Australia requires all public-private partner-
ship (PPP) project proposals to consider environmental
and community issues alongside financial and budgetary
factors prior to receiving government support. This
ensures that all appropriate stakeholders are involved,
including the government, the private sector, and the
community.2
A crisis can be a catalyst to change the financing
approach
In some circumstances the public needs to be convinced
that the need for infrastructure development and the
associated expenditure fulfills a critical need. History
tells us that an infrastructure-related crisis can often
be the catalyst for such a shift in opinion. For example,
failure of flood protection, power outages, or bridge
collapses can lead to support for private finance if it
delivers the infrastructure that will improve people’s
lives. Sadly enough, history also tells us that such crises
often need to happen twice before public support for
the investment case becomes overwhelming. For exam-
ple, in the 20th century, London was twice affected by
flooding (1928 and 1953) before the Thames Barrier
was constructed.3
1.5: Understanding and Managing Public Perceptions
Resistance to private finance may lessen if the result is
new infrastructure or improved operations
Public support for infrastructure development can increase
when the investment is regarded as transformational.
Transformative infrastructure projects do not merely
repair existing infrastructure, but seek to transform and
improve the sector. Examples of these include develop-
ing a high-speed rail network, renewable energy sources,
or new schools or hospitals. Such improvements will be
seen as critical to improving the quality of life in that
community or sector, and, consequently, resistance to
private finance may fade.
Certain infrastructure projects are “hidden.” For
example, people will think about power-generation
infrastructure only when the lights do not come on.
Other types of infrastructure—such as the development
of a new bridge or a new subway system—are much
more visible in people’s daily lives.
The immediacy of the more visible infrastructure
can help build public support for its upkeep (and the
associated expenditure). This visibility can be a double-
edged sword, however, as the public and communities
may feel a much greater sense of ownership of this
more apparent infrastructure. Consequently it may
resist changes to operational models, especially if those
changes entail a transfer of ownership from public or
private hands. 27
“Complex and, in many countries, new
structures, PPP projects are often mis-
perceived. Consequently, there is a critical
need to engage all relevant constituencies—
informing them while heeding their concerns—
before, during, and after the PPP procurement
process.”
— Samara Barend, Former Executive Director,
New York State Commission on State Asset Maximization
The choice of contract approach can greatly impact public
opinion
Privatization can be viewed as the public sector selling
its crown jewels, or most valuable assets. Privatization
can also be seen as the private sector profiteering from
the delivery of “public” services and assets. On the other
hand, privatization can be viewed as a partnership
between the public and private sectors whereby the
benefits from privatization can flow to the public sector
and provide the financing for the development and
improvement of other infrastructure. Partnerships and
concessions can be viewed as tapping private-sector
skills and expertise and transferring operational risk to
the private-sector party.
Given these potential impacts of contract approach
on public opinion, the way the preferred approach is
1.5: Understanding and Managing Public Perceptions

determined and its potential benefits will need careful

explanation. The Chicago Skyway project is an example
of a successful approach that incorporated two points
of view: some referred to it as a privatization, others a
concession, but what it did achieve is a significant up-
front payment to the City of Chicago with very little
public resistance (see Case Study 6: Chicago Skyway
Project).
One criticism of projects involving private finance
is that they are typically those that are the easiest to
develop, deliver, and, possibly, profit from; and that
the most complex or controversial projects are thought
to be typically left for public funding. Consequently,
governments should articulate the fact that such part-
nerships enable them to efficiently meet a need that
they could not otherwise fulfill.

Having a public relations plan should be integral to any

project
A successful public relations approach should assure
and communicate the fact that all the projects are not
only carefully selected but also well designed. In addi-
tion, consistency and transparency should be upheld
at every stage of the project. An example of a public
authority thinking carefully about how to position its
PPP program in the mind of the public is California,
28 which promotes its program as “performance-based
infrastructure” that aims at being better, safer, and more
accountable.

Notes
1 Kahneman and Tversky 1979.

2 NSW Government 2006.

3 The Environment Agency 2010.

References
The Environment Agency. 2010. “A History of Flooding on the Tidal
Thames.”April 29. Available at http://www.environment-
agency.gov.uk/homeandleisure/floods/117047.aspx.

Kahneman, D. and A. Tversky. 1979. “Prospect Theory: An Analysis of

Decision under Risk.” Econometrica 47 (2): 263–91.

New South Wales Government. 2006. Working with Government:

Guidelines for Privately Financed Projects. December. Sydney:
NSW Treasury. Available at http://pandora.nla.gov.au/pan/31320/
20080214-1514/www.treasury.nsw.gov.au/__data/assets/
pdf_file/0009/3141/wwggui_1.pdf.
Part 2
Building the Structure:
Developing the Market
for Private Finance
 2.1: Creating a Program of Prioritized Opportunities
CHAPTER 2.1 Statistics on PPP transactions suggest that approximately
58 percent of the total has been invested in Western
European countries over the past 10 years. So what is it
Creating a Program of about the approach taken by countries in this region
that has led to this success? A key factor is that some of
Prioritized Opportunities the countries that have been most successful at attracting
private finance have had a clear program and pipeline of
opportunities for review by private financiers. Examples
of successful PPP programs are those in British
Columbia, Canada (see Case in Point 1), and the
Portuguese SCUT roads program (see Case in Point 2).
The features of a successful program of opportunities are
examined in this chapter.

Building a program does not merely require identifying

projects but also cultivating the broader environment
in which projects will progress
Some of the features that are needed to support a pro-
gram are listed in Figure 1. The absence of any of these
elements will jeopardize the successful outcome of the
project.
One of the reasons these features of infrastructure
projects are important is that projects typically require
a long lead time, from identifying the opportunity to
closing the contract. Even in countries with an estab-
lished PPP program supported by standard contracts, an 31
established procurement framework, and cross-party
political support, it takes on average just under three
years to tender and reach financial close on a PPP proj-
ect.2 The investment payback time is even longer. If
there is a construction period, then the debt repayment
might not start for three or four years after the contract
has been signed; the time for equity payback may be
many years after that.
During this project procurement period, private
financiers are likely to have invested significant time
and resources to develop the opportunity, often in a
competitive bidding process. They will recover these on
contract close only if they win and the project proceeds.
It can be difficult to put a number on these costs, but,
to provide some context, a private-sector consortium
is claiming compensation of about UK£ 27.8 million
following the cancellation of a PPP hospital project
some 20 months after the consortium had been
appointed the preferred bidder.3
We will discuss in greater detail some of the key
features of a project programme that can help overcome
some of these initial frictions.

The procurement policy: Political support with a clear

investment rationale is crucial
If political support is undefined and procurement policy
lacks clarity then investors will not even want to estab-
lish a presence in the market. In many respects, this has
happened in the United States with its P3 program. In
the past few years, a number of international corporate
2.1: Creating a Program of Prioritized Opportunities

Case in Point 1: The British Columbia PPP program

Partnerships BC is a dedicated agency created in 2002 to
evaluate, structure, and implement public-private partnership
(PPP) projects in the Province of British Columbia, and to act as
a center of procurement expertise. It was established because
of a serious infrastructure gap in health, advanced education,
and transportation. The agency is wholly owned by the Province
of British Columbia and reports to the Minister of Finance, its
only shareholder. Current funding for Partnerships BC is C$6–8
billion.
The core business of Partnerships BC is to:
• provide specialized services for government and its agen-
cies, ranging from advice and project leadership/manage-
ment to identifying opportunities for maximizing the value
of public capital assets and developing PPPs;
• foster a business and policy environment for successful
PPPs and related activities by offering a centralized
source of knowledge, understanding, expertise, and
practical experience in these areas. It does this at all
stages of a project from the initial feasibility analysis and
preparation of business cases through to the procurement
process and to project implementation; and
• manage an efficient and leading-edge organization that
meets or exceeds performance expectations.
Since 2002, Partnerships BC has been involved with
approximately 30 projects with a capital value approaching
C$10 billion, including Abbotsfield Regional Hospital & Cancer
Centre (C$355 million), Sea-to-Sky Highway Improvement
Project (C$600 million), and the William R. Bennett Bridge
(C$144 million).
Each completed PPP project in British Columbia has
achieved value for money for British Columbia taxpayers,
including (1) quantitative factors such as life-cycle savings
and (2) qualitative factors such as appropriate risk transfer
and performance-based contracts that ensure that high-quality
infrastructure and services are provided by the private-sector
partners.

32

Case in Point 2: The SCUT roads program, Portugal

In 1996, the Portuguese government set up a program to pro- The success of the program has been tarnished by the
cure seven shadow toll road concessions to upgrade or build budgetary burden that the shadow toll regime has created
approximately 900 kilometers of roads at an estimated capital for the government. Shadow tolls are actual payments made
cost of €5 billion. The projects were commonly referred to as by the government to private-sector operators of a road based
SCUT projects, reflecting the acronym for Sem Custos par os on factors such as the number of vehicles using the road in
Utilizadores (translated as “No Cost to the Users”). a given period. The shadow toll subsequently provides the
The government wanted to achieve rapid growth of both its finance for these privately funded road schemes under a
internal road network and transport links with Spain. However, design, build, finance, and operate (DBFO) program. In 2007
given national constraints on its ability to deliver and finance it was announced that the concessions would be converted
such an ambitious undertaking, the government needed to to real tolls, but the terms of the conversion are still subject
structure a program that would attract international bidders and to negotiation.
financiers.
Although the early programs threw up some challenging
procurement issues, such as those relating to land expropria-
tion and environmental permits, within three years the first
two concessions had been awarded and all seven were in place
by September 2002. The projects were primarily financed by a
combination of project finance banks, both local and interna-
tional, and the European Investment Bank. In 2007, all of the
concessions were fully operational. By any measure this was
quite an achievement.

Figure 1: Key factors in a successful infrastructure
project programme
☑ Clear policy
☑ Political support
☑ Ongoing pipeline
☑ Presence of necessary laws and regulations
☑ Administrative capability and capacity
☑ Pathfinder projects
☑ Sizeable oppportunities
☑ Credible project timetable
investors and contractors established teams in the United
States in the expectation of a substantial program of PPP
projects, but there have been fewer opportunities than
anticipated. Those investor teams have been repatriated
or downsized and are not even certain that they would
return if the sector develops.
Another factor that helps to indicate the presence
of political and policy support is the ability to demon-
strate that the program is fully integrated with and
reflects a country’s infrastructure needs and has main-
stream support. Recently the Australian government
has pioneered a move to establish independent bodies,
such as Infrastructure Australia, charged with auditing
the nation’s existing infrastructure and putting in place
long-term planning and prioritization of infrastructure
investment. The Australian government is building its
procurement programs around this work (see Case in
Point 3: Australia’s Future Fund and Infrastructure
Australia).
Ongoing pipelines of opportunities are more likely to
attract bidders than ad hoc procurement
The concern of investors is primarily whether the
opportunity is a one-off or there is the possibility of
repeat opportunities. This information will help them
assess the size of the potential market and whether the
opportunity is one that they can build a team and/or
business around. Having a program not only encourages
more investors to enter into the market but should also
create a more competitive environment. This competi-
tion should in turn generate better overall value for
2.1: Creating a Program of Prioritized Opportunities
money because future deals should benefit from a more
streamlined and quicker process with experienced prac-
titioners on both sides of the transaction.
For investors, having a pipeline of bidding opportu-
nities means they can hope to have a higher probability
of success, which in turn allows them to consider the
cost of bidding across this portfolio of bids rather than
on a project-by-project basis.
The necessary laws and regulations must be in place
before transactions take place
Developing a procurement process that does not fit with
the existing relevant laws and regulations is highly costly
and time-consuming. This is also one of the areas that
will be a main deterrent for private investors. Sometimes
the insufficiency of the existing laws is not known or
understood until the parties are in the heat of a transac-
tion. To mitigate this risk, selecting a small number of
pathfinder projects that can be used to test the approach
planned for the main program can provide substantial
benefits, as it will bring to the fore circumstances where
the existing laws and regulations are inadequate.
“A program of opportunities that creates
a steady stream of relatively consistent deals
over a number of years can contribute to 33
achieving national policy goals.”
— Ryan Orr, Executive Director,
Stanford University – Collaboratory for
Research on Global Projects
Administrative support needed for a successful program
should not be underestimated
There are significant advantages in supporting a clear
program with “standard” procurement routes, where
various factors, such as the procurement timetable, con-
tract and regulatory regimes, and payment mechanisms,
are familiar. Investing time and effort in advancing these
routes helps. This requires substantial administrative sup-
port not only to put the processes in place but also to
coordinate and monitor their implementation across
procuring bodies and over time (see Case in Point 1: The
British Columbia PPP Program).
Pathfinder projects preempt problems and demonstrate
success
There is strong evidence that, in developing a new sector,
if the public authority can articulate a program of prior-
itized opportunities with pathfinder projects to test and
refine the proposition, projects are more likely to attract
greater commercial interest and competitiveness among
private finance solutions. One example of a successful
program that used a pathfinder approach is India’s PPP
program. The highways portion of that program alone,
launched in summer July 2009, is probably the biggest
2.1: Creating a Program of Prioritized Opportunities

Case in Point 3: Australia’s Future Fund and Infrastructure Australia

Future Fund impediments facing national infrastructure, the needs of users,

The Future Fund approach was first established by the Australian and possible financing mechanisms. It accomplishes this by:
government in 2006 to assist future Australian governments in
meeting the cost of public-sector superannuation liabilities by 1. conducting audits on all aspects of nationally significant
delivering investment returns on contributions to the Fund. infrastructure, in particular water, transport, communica-
Subsequently, three “sister” funds were established in 2008 tions, and energy;
to focus on certain kinds of infrastructure. These included the
Building Australia Fund, the Education Investment Fund, and 2. drawing up an infrastructure priority list involving billions
the Health & Hospitals Fund. These three funds are referred to of dollars of planned projects; and
as the Nation-Building Funds.
The value of these funds on 31 December 2009 was: 3. advising government, investors, and infrastructure devel-
opers on regulatory reform and procurement guidelines
Fund $A billions
aimed at ensuring efficient use of infrastructure networks
Future Fund 66.2 and speeding up project delivery.
Education Investment Fund 10.1
Health & Hospitals Fund 4.9
Key stakeholders include Australia’s states, territories, and
local governments as well as the private sector.
Investment responsibility of the Future Fund lies with a
board of guardians, while administrative and operational sup-
port is offered by a management agency. The Future Fund has Achievements
received contributions from government budget surpluses as • Thirty-six programs had been started and/or completed by
well as proceeds from the sale of the government’s holdings of June 2009. These include the North-South Bypass Tunnel
Telstra and the transfer of the 2 billion remaining Telstra shares. (Queensland government), the Alternative Waste
Funds will be withdrawn only after 2020. The exceptions will be Technology Facility (New South Wales government), and
to meet operating costs or if the balance exceeds the target the Defense Headquarters Joint Command Facility
asset level. (Australian government);
34
The Building Australia Fund is funded from government
budget surpluses in 2007–08 and 2008–09. It is focused on build- • the completion of the national infrastructure audit;
ing critical economic infrastructure including roads, rail, port
facilities, and broadband facilities. Expenditure will be guided • the development of an infrastructure priority list; and
by Infrastructure Australia’s infrastructure priority list.
• the development of best practice guidelines of public-
private partnerships.
Infrastructure Australia
Infrastructure Australia was established by the Australian
government in April 2008 to develop a plan for Australia’s future
infrastructure needs and to facilitate its implementation.
Infrastructure Australia’s role is to advise the Australian
government, state governments, investors, and infrastructure
owners concerning nationally significant infrastructure priorities,
desirable policy and regulatory reforms, options to address

PPP program in the world: it has an estimated invest-
ment of US$70 billion over the next three years, with
private-sector participation expected to be about US$40
billion, of which US$10 billion is expected to come
from foreign investors. The public procurers intend to
use the experience of the past five years to make the
procurement investor friendly (see Case in Point 4:
India’s PPP program).
Another example is found in the Chilean roads
program. The success of the original program is due at
least in part to its innovative structure, which allowed
the government to flex the concession period so that
investors could achieve target return. A number of these
projects are now on the secondary market (see Chapter
1.3 Case in Point 2: Chilean private-public partnership
roads program).
 2.1: Creating a Program of Prioritized Opportunities
Case in Point 4: Public-Private Partnerships: India

Overview From 1995 to 2007, senior debt accounted for 68 percent of

Public-private partnerships (PPPs) in India were established project financing, on average. The rest took the form of equity
to leverage public capital to attract private capital while also (25 percent), subordinated debt (3 percent), and government
benefiting from private-sector expertise, operational efficien- grants (4 percent)—which are typically viability grants provided
cies, and cost-reducing technologies. At the central government during construction to PPPs deemed economically desirable but
level, these partnerships are coordinated by the Government not financially viable. Typical concession terms encourage the
of India (GoI) through the Ministry of Finance (Department of use of debt over equity.
Economic Affairs). The GoI has also announced various policy The scale of this investment is illustrated by the State
initiatives in order to foster an enabling environment for PPPs. Bank of India coming out as the No. 1 Global Initial Mandated
These include fiscal incentives, a streamlined approval process, Lead Arranger in the 2009 Project Finance International league
and a stable policy environment tables—they arranged lending for 37 deals with total lending of
As of 2007, there were more than 300 PPP contracts US$19.9 billion, representing 14.3 percent of total lending
signed in the country. India is expected to have an investment nationwide in the year.
requirement of US$500 billion over the next five years, with
US$150 billion expected through PPP projects. It is the biggest
Successes
PPP program in the world.
Some of the achievements to date include the modernization
Key stakeholders include the Ministry of Finance (GoI),
of the Mumbai and Delhi International Airports, improvement of
sectoral ministries (such as Roads, Aviation, etc.), private
various port facilities, greenfield private ports, several national
institutions, and Indian states. The sectors handled include
highways, and the commercial utilization of surplus land. The
highways, railways, ports, airports, and power. Recently, the GoI
roads building program aims to build 7,000 kilometers each
has started experimenting with PPPs in social sectors such as
year for the next five years. This translates to approximately 20
health, education, and housing.
kilometers per day; currently, approximately 10 kilometers of
roads are being built each day, more than double the rate of
Funding a year ago.
The India Infrastructure Finance Company Limited (IIFCL) has 35
sanctioned US$4.6 billion (as of October 21, 2009) in financial
assistance to 95 projects across 5 sectors. The IIFCL lends up to
20 percent of project costs. Other institutions that have provided
financial assistance include the Infrastructure Development
Finance Company (IDFC), ICICI Bank, the State Bank of India,
Punjab National Bank, Canara Bank, and Infrastructure Leasing
& Financial Services Limited. Multilateral agencies are also
active in the infrastructure financing, and one of them—the
Asian Development Bank (ADB)—has been allowed to raise
rupee bonds and carry out currency swaps to provide long-term
debt. Dedicated infrastructure funds are being encouraged in
order to provide equity. An example of this includes the India
Infrastructure Finance Initiative.

Investment in a project program is vital to maximixze sectors that have been successful in involving the private
the role of private finance sector.
The risks of private finance are magnified if a programme
is not in place. Table 1 summarizes the possible conse-
queneces if key program features are missing. Evidence Notes
that there is an ability to attract private finance by creating 1 Dealogic, accessed February 3, 2010.

a clearly articulated and well thought through and sup- 2 NAO 2007.
ported program of opportunities seems overwhelming. 3 Griffiths 2010.
This ability seems to be characteristic of countries and
2.1: Creating a Program of Prioritized Opportunities

Table 1: Possible risks if key program features are absent

Factor Risk if absent

Clear policy Lack of a clear policy can mean the program is not integrated with infrastructure needs. Delivery bodies are not
appropriately empowered, leading to ad hoc and uncoordinated approaches to procurement that may lead pri-
vate players to cherry pick the most favorable terms.

Political support Lack of political support can result in uncertainty that the program will proceed.

Ongoing pipeline Lack of an appropriate pipeline can increase transaction costs, lack of credibility, and variation of bids,
making comparison difficult.

Presence of necessary laws and Lack of needed laws and regulations can mean delays or ultimately abandonment of the project.
regulations

Administrative capability Inadequate administrative ability can result in lack of consistency and coordination across public bodies
and capacity and inability to transact projects and ongoing contract management.

Pathfinder projects Not using pathfinder projects can result in no time to review whether all other factors are in place and
whether draft contracts include appropriate and realistic terms, such as risk transfer.

Sizeable opportunities Few opportunities can lead to a lack of interest and competition, which in turn may increase costs.

Credible project timetable An unrealistic timetable may lead potential bidders to question the whole procurement process and in turn
they inflate costs, and so on, to give some protection should the timetable and process extend beyond that
planned.

36 References roadtraffic-technology.com. 2010. “Duoro Litoral Road, Portugal.”

Net Resources International. Available at http://
Australian Government. 2010. Infrastructure Australia. Available at
www.roadtraffic-technology.com/projects/duorolitoral/.
http://www.infrastructureaustralia.gov.au/index.aspx

Dealogic. Dealogic database (accessed February 3, 2010).

European Parliament, 2006. “Public-Private Partnerships: National

Experiences in the European Union.” DG Internal Policies of the
Union, February 22. PE 369.858. Briefing Note No.
IP.A/IMCO/SC/2005-160. Brussels: Centre for European Policy
Studies. Available at http://www.europarl.europa.eu/comparl/
imco/studies/0602_ppp02_briefingnote_en.pdf.

Future Fund Board of Guardians. 2007–10. Future Fund. Melbourne:

Future Fund Management Agency. Available at
http://www.futurefund.gov.au/ (accessed 2010).

———. 2009. futurefund Annual Report 2008/09. Melbourne: Future Fund

Board of Guardians. Available at http://www.futurefund.gov.au/
__data/assets/pdf_file/0018/3546/15333_FF_AR_WEB.pdf

GoI (Government of India), Ministry of Finance. PPP India Database.

Available at http://www.pppindiadatabase.com/ (accessed 2010).

Griffiths, S. 2010. “Leicester PFI Hospital Claim Reaches £28m.”

Building Magazine, January 15. Available at
http://www.building.co.uk/story.asp?stroycode=31562299.

Harris, C. and S. K. Tadimalla. 2008. “Financing the Boom in

Public-Private Partnerships in Indian Infrastructure: Trends and
Policy Implications.” Gridlines No. 45, December. Available
at http://www.ppiaf.org/documents/gridlines/
45_financing_PPP_India.pdf.

Mohan, G. 2008. “Overview of Government of India’s Initiatives

to Encourage PPPs.” Ministry of Finance, Government of
India. Available at http://www.pppinindia.com/round-table-files/
dea/govind_mohan_dea_ppp_nov2008_kochi_meet.pdf.

NAO (National Audit Office), United Kingdom. 2007. Improving the

Tendering Process. Report by the Comptroller and Auditor
General, March 8.

Partnerships BC website: http://www.partnershipsbc.ca/index.html

(accessed March 2010).

CHAPTER 2.2
The Challenge of Building and
Sustaining Transaction Skills
2.2: The Challenge of Building and Sustaining Transaction Skills
At the heart of any infrastructure transaction is the
government—as partner, regulator, grantor of conces-
sions and licenses, seller, or investor. Yet despite the
importance of the infrastructure sector, building and sus-
taining the relevant skill set within the government has
been a challenge in both developing and emerging mar-
kets.
In this chapter, we have highlighted some of the
consequences of those skill gaps, the environment that
can perpetuate them, and how they might be addressed.
Insufficient commercial skills can severely hinder
infrastructure procurement
Skill gaps can become an impediment to infrastructure
development in four areas:
• intelligent procurement,
• provision of best value for money,
• efficient decision-making, and
• the ability to react to change.
Intelligent procurement
Intelligent procurement means the ability to design and
promote commercially viable propositions or programs.
Projects or programs that have come to market based on
poorly thought out proposals will fail to attract private 37
finance or will attract such a range of responses that it is
then difficult to compare and select a winning bid. Such
an approach may also create a wider loss of credibility
and can taint the program or project even when it is re-
launched.
Provision of best value for money
One of the greatest challenges in the procurement
process is negotiating transactions that represent good
value for money; this is a concern whether infrastructure
is being publicly or privately financed. There can often
be a perception (one that sometimes reflects reality)
that public authorities do not have the necessary busi-
ness acumen to transact the “best” deal.1 In Chapter 1.5
(about public perception), we touched on the use of
value-for-money analysis and the creation of a public-
sector comparison to a private sector bid. There is not an
expectation that all of these skills will be, or even should
be, held in-house; rather there is an understanding of
the scope of work required by specialist advisors and an
ability to interpret their findings as needed.
Efficient decision-making
While there undoubtedly remains a role for govern-
ments to appoint specialist advisors, as indicated above,
this should not be a substitute for knowledge of the
fundamentals (whether technical, legal, or financial) by
public servants so that informed decisions can be made.
The public authorities should not consider the use of
advisors to be a reason to abdicate their decision-making
2.2: The Challenge of Building and Sustaining Transaction Skills

Figure 1: Reasons for delivery to contracted price

The “fixed price” nature of the PFI contract

and other incentives or penalties included in the contract
Clear output specifications stipulated in the contract
Good forward planning for the construction
done during the procurement phase
Quality of public-sector project management

Realistic plans based on a clear understanding of the project

Good relationship between the private and public sectors

All stakeholders “signed up”

Quality of the design of the asset(s)

Quality of external advisors/consultants

Quality of private-sector project management

Other

0 10 20 30 40 50 60

Projects delivering to contracted price (%)

Source: Based on NAO, 2009.

38

role. Being able to understand the fundamentals also Transaction capacity can be built through a
ensures that advisors can be challenged and an educated combination of understanding of skills needed,
conclusion—including whether to accept or reject the training, and dedicated funding
advisors’ recommendations—can be reached. The following can be effective in addressing skills gaps:

The ability to react to change
A sound understanding of the commercial environment,
particularly the financial markets, will help governments
react to change faster and more effectively. This is true
whether it is a change that occurs during the course of
the transaction or in the context of downstream con-
tract revisions. As evidenced in the current economic
environment, some public procurers did not know how
to react to the turmoil around them, and, after a period
of denial, many problems remained; others came up
with practical and relevant responses.
Several of these transaction capacity factors are
captured by a review undertaken by the UK financial
comptroller who looked at the reasons that it is impor-
tant to deliver projects to their contracted prices, as
shown in Figure 1.2 Many of the reasons highlighted
are about clarity of what is wanted, responsibilities,
management skills, and relationships among parties.
• recognizing what skills are needed for complex
transactions,
• training staff,
• avoiding staff rotation, and
• providing sufficient funding for public bodies that
promote and procure infrastructure.
We address them futher below.
Recognizing the skills needed for complex transactions
This Report only touches briefly on the complexity of
actual procurements and transactions. Private parties
will employ specialist and experienced staff and advisors
to develop multiple opportunities. Yet for the public
counterparty, involved staff may only experience one
infrastructure procurement project in their career. Often
their responsibility for delivering a project will be an
addition to their current workload rather than a separate
assignment. As a result, they may become overwhelmed
by the volume and complexity of the process.

Recognizing the complexity of transactions and proper-
ly resourcing the procurement teams goes a long way
toward a successful procurement.
Training Staff
Even when proper resources are in place it is vital that
employees have relevant training to fulfill their role. In
some instances, this will be specialized training on issues
such as public procurement laws. In others, it will be
general training about project management, including
financial analysis and operational standards.
Avoiding staff rotation
It is not uncommon for public-sector employees to
regularly rotate their posts. Although this can be very
beneficial for developing the breadth of the authorities’
overall experience, it can severely limit the development
of specialist knowledge. Infrastructure projects can be
particularly hard hit by this approach because of the
time they take to progress: project timelines can easily
exceed a rotation. The level of procurement by some
public authorities, however, may not merit a specialist
team. In such circumstances the timing of rotations
needs to be carefully considered.
Providing sufficient funding for public bodies that promote
and procure infrastructure
Procurements valued at many million dollars cannot be
transacted on a shoestring. Indeed, attempting to transact
a procurement with minimum upfront costs can prove
to be a false economy, as it may result in suboptimal
transactions with reduced value for money over the
period of the contract.
Some countries and regions may provide a template
for building transaction skills
It is common to set up a national or local unit solely
focused on setting policy and promoting and advising
on the procurement of PPP projects. Globally there are
at least 150 such units.3 The majority of these organiza-
tions have been set up as government agencies, often
within the ministry of finance, but there are a handful
of examples where they are PPPs themselves. For example,
Partnerships UK is 51 percent owned by private-sector
parties;4 in Germany, Partnerschaften Deutschland has
been set up recently with majority ownership held by
the federal and state government and 28 percent by pri-
vate-sector companies.5 These units aim to become the
knowledge and expertise centers that support the wider
procurement.
The European Investment Bank (EIB) has recognized
that institutional knowledge is key to success and has
sought to supplement existing PPP networks, through
the European PPP Expertise Centre (EPEC), which
brings together the public-sector PPP taskforces across
2.2: The Challenge of Building and Sustaining Transaction Skills
the European Union (both member states and candidate
countries).
Some of the more mature regional infrastructure
markets have sought to help other regions. For example,
Partnerships UK assisted in the Infrastructure Consortium
for Africa’s publication Attracting Investors to African
Public-Private Partnerships: A Project Preparation Guide,7 and
they also regularly run training courses on PPP for
countries across the globe.
The challenges of building transaction capacity will
be different in every country and region, but getting it
right is at the heart of any successful infrastructure
development. The approach taken by the EIB to provide
a forum to support regional liaisons is one model that
can be usefully applied across the world.
Notes
1 Business acumen was described as “the ability to take sound
commercial decisions based on an understanding of the
motivations of private sector counterparties” in the United
Kingdom’s National Audit Office report Commercial Skills for
Complex Government Project, dated November 6, 2009.
2 NAO 2009a.
3 This figure represents the World Economic Forum’s own estimate
and includes units at the national and local/state levels.
4 See the Partnerships UK website:
http://www.partnershipsuk.org.uk/PUK-Shareholders.aspx.
39
5 See the Partnerschaften website:
http://www.partnerschaften-deustscheland.de/.
6 See the European PPP Expertise Center:
http://www.eib.org/epec/.
7 World Bank and ICA 2009.
References
NAO (National Audit Office), United Kingdom. 2009a. Performance of
PFI Construction: A Review by the Private Finance Practice,
October. London: NAO. Available at http://www.nao.org.uk/
publications/0809/
pfi_construction.aspx.
———. 2009b. Commercial Skills for Complex Government Projects,
November. London: NAO. Available at http://www.nao.org.uk/
publications/0809/commercial_skills.aspx./.
World Bank and ICA (Infrastructure Consortium for Africa). 2009.
Attracting Investors to African Public-Private Partnerships: A
Project Preparation Guide. Washington, DC: World Bank.

CHAPTER 2.3
Multilateral Banks: Building
Skills and Markets
2.3: Multilateral Banks: Building Skills and Markets
Multilateral development banks (MDBs) are “institutions
that provide financial support and professional advice for
economic and social development activities in develop-
ing countries.”1 The largest of these include banks from
the World Bank Group along with the following four
regional development banks: the African Development
Bank (AfDB), the Asian Development Bank (ADB), the
European Bank for Reconstruction and Development
(EBRD), and the Inter-American Development Bank
(IADB) Group. MDBs occupy a unique position: they
not only provide finance for infrastructure projects, but
their multinational ownership structure and pan-regional
outlook mean that they can provide an important
bridge between the public and private sectors.
The MDBs play a significant role in financing public-
private partnership financing for infrastructure
The MDBs provide significant financing for public-
private partnerships (PPPs). One of the consequences of
the current global financial crisis is that the importance
of multilateral and bilateral agencies, as well as export
credit agencies, is increasing. These multilateral sources of
funds are particularly important because more traditional
sources of funds—such as governments and private
finance—have less money and fewer resources available
since the global economic crisis began in 2007. 41
An example of MDBs working together to provide
financing and facilitate private finance is the role taken
by the AfDB and MIGA for the Doraleh Container
Terminal project in Djibouti (Case Study 7).
“Through collaborative efforts of the multi-
lateral development banks, the PPP approach
has emerged as an effective tool for govern-
ments to enhance the private investments
in infrastructure and social sectors needed
for economic development and poverty
alleviation.”
— Rajat M. Nag, ADB’s Managing Director General
Improving conditions for private-sector participation is
a vital service provided by the MDBs
In many cases, money is no longer the core resource
being sought from MDBs. In the case of ongoing proj-
ects, MDBs often act as independent mediators between
public and private parties when issues develop. For
example, issues of corruption and abuse of political
power can be addressed by MDBs, which may have the
leverage and recognized neutrality to improve the situa-
tion. Multilateral banks and other multilateral financial
institutions, including subregional banks, can stand up to
2.3: Multilateral Banks: Building Skills and Markets
“PPP assistance is most effective when it is
part of a long-term engagement effort and
integrated with broader sector reforms and
institutional capacity development. With this in
mind, ADB endeavors to play a pro-active role
in PPP advocacy along with other key donors
and private sector stakeholders.”
— Joe Yamagata, Deputy Director General of the Private Sector
Operations Department of the ADB and Chair of the PPP Task
Group in ADB.
political pressure and provide informal political risk
cover when they act as independent mediators.
The role of international development financial
institutions now focuses on improving conditions for
private-sector participation through the development
of PPP policy, legal, and regulatory frameworks and
institutions; improving the overall investment climate;
and developing PPP pilot transactions. Recent support
has included the development of cross-sector legal,
regulatory, and institutional frameworks, which are
crucial in building and sustaining the required political
commitment and institutional capacity for larger-scale
private-sector participation in infrastructure.
The MDBs play an important role in encouraging
42
participation of the private sector in funding infrastruc-
ture projects because of their long-term relationship with
developing member governments. PPP development
requires sustained policy dialogue and support for the
development of suitable legal, regulatory, and institutional
frameworks and assistance in the development of PPP
pathfinder projects—and MDBs can offer an approach to
many developing-country governments that allows the
private sector a seat at the table. PPPs often require prior
sector restructuring and tariff reforms to be effective.
The use of PPPs on a larger scale requires substantial
government capacity to identify and develop projects
and to regulate and monitor PPP contracts. Support
for policy reforms, capacity development, and pilot
transactions can often proceed in parallel, and MDB
involvement can keep all parties in the dialogue.
There are several elements that an MDB can
provide that are particularly important for a project to
be successful. These include:
• sector-development planning that adequately con-
siders the role of the private sector in infrastructure
development;
• project preparation in terms of adequate feasibility
studies, land acquisition, and social and environmental
assessments;
• delivery and management of government PPP sup-
port; and
• appropriate risk-sharing arrangements between
public- and private-sector partners.
The feasibility of PPPs in countries where public
services have devolved to subnational and local govern-
ments, and the potential for PPPs at different government
levels have to be carefully assessed. Country-specific
conditions need to also be considered, as past PPP proj-
ects have been less successful because of a deficiency of
institutional capacity, a lack of economies of scale, and
insufficient government funds.
MDBs are partnering to provide a consistent set of
tools for capacity building
A critical joint capacity development initiative involving
the World Bank Institute, the IADB, and the ADB
Institute is the Multilateral Public-Private Partnership
in Infrastructure Capacity Development (MP3IC). The
objective of the MP3IC is to develop and implement a
learning program that is relevant for a globally diverse
group of PPP practitioners. The MP3IC has focused
on three important aspects of governance: the role
of leadership and stakeholder involvement, the need
for transparency and accountability, and the role of
subnational and local governments in ensuring cost-
effective delivery of infrastructure.
The future scope of the MP3IC program will
emphasize modules and products that are cross-sectoral
in nature for wider applicability. The modules will be
suitably structured to address the breadth of political
and administrative decision-makers as well as the deeper
requirements of PPP practitioners and program managers.
Potential training institutions in different regions will be
identified to develop and deliver programs.
Risk mitigation and guarantees are one further service
that the MDBs can supply
The MDBs—either directly, or indirectly through related
agencies such as the World Bank Group’s Multilateral
Investment Guarantee Agency (MIGA)—provide risk
mitigation through formal political or partial risk insur-
ance (or guarantees) against certain non-commercial
(country or political) risks to investments in developing
countries. Covered risks include transfer restriction, expro-
priation, breach of contract, war and civil disturbance,
and the non-honoring of sovereign financial obligations.
Breach of contract coverage can be particularly useful
for PPPs where governments are contractual partners.
MDBs have provided unique assistance in response to
the financial crisis
The MDBs have responded to new needs for technical
assistance that have become evident only following the
financial crisis. This includes:
 2.3: Multilateral Banks: Building Skills and Markets
• providing rapid-response assessments of contingent
liabilities.

• maintaining existing assets pursuant to a greater

focus on operation and maintenance (O&M)
projects because these projects are relatively easy
to structure at a time of constrained liquidity.

• assisting projects in distress or putting into place

measures for dealing with contractual issues that
may arise. Governments need technical assistance
in making decisions on whether to slow or stop
investments; how to respond to the potential
entry of new investors into distressed projects; and
whether to contribute their own debt or equity to
projects, allow asset sales, and permit mothballing
of projects or termination of contracts.

• maintaining a project pipeline in the face of chang-

ing market realities. Once these pipelines shut down,
fully restarting them typically takes years. To keep
the momentum going, governments will need to
evaluate innovative approaches to structuring PPP
projects.

Notes 43
1 World Bank. Multilateral Development Banks (accessed May 13,
2010).

References
ADBI (Asian Development Bank Institute). 1998-2010. “Strengthening
Governance for Infrastructure Service Delivery: The Role of Public
Private Partnerships (PPPs).” Post-Event Statement. Available at
http://www.adbi.org/event/2893.ppp.governance.infrastructure.
delivery/.

Glennie, E. 2009. “Multilateral PPPI Capacity Building Initiative

(MP3IC).” March 10, Presentation. ADBI. Available at
http://www.adbi.org/files/2009.03.10.cpp.sess6.glennie.
multilateral.pppi.capacity.building.pdf.

World Bank. Multilateral Development Banks. Available at

http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/
0,,contentMDK:20040614~menuPK:41699~pagePK:43912~piPK:
44037~theSitePK:29708,00.html (accessed May 13, 2010).
 2.4: Understanding and Managing Land Value
CHAPTER 2.4 Infrastructure related issues around land vary significantly
from country to country. In some parts of the world
land is a commodity that can be freely sold and bought,
Understanding and Managing and in others it is people’s lifeline—their land is the
source of their livelihood. However, regardless of region,
Land Value land ownership and land value are generally extremely
emotive topics and are very important to infrastrcuture
finance decisions. We consider these implications in
further detail in this chapter.

Both the cost of acquiring land and the change in its

value caused by its development must be considered
At its simplest, on one side of the project “income
statement” are the costs associated with land and on the
other side is the change in the value of that land as a
result of the project. It is important to capture both sides
of this equation.
The costs of acquiring land for infrastructure devel-
opment can be significant. These can include compen-
sating the existing landowners and those who claim the
value of their land has fallen or been impacted. Such
claims include the noise of being under an airport
flight path, the unsightly nature of a power station and
increased local traffic. On the other side of the “income
statement” is the potential increase in land value that
results from the infrastructure. For example, the land 45
corridor around a new metro line is likely to go up in
value because of improved accessibility.

The full complexity of value change must be

considered
Value change calculation is a particularly complex area
when existing landowners are seeking not just the
current land value but also future land value increases
and the loss of future earnings. A further complexity
is introduced when neighbors claim compensation for
blight from development.
When calculating the total compensation amount,
ascertaining a value will usually follow a negotiated
process as subjective elements are involved. These
negotiations can take a long time, sometimes years.
Transparency is very important as public authorities
need to show they are not abusing their power to
obtain land by failing to fully compensate owners.
Even when an established land acquisition process
is in place, there can still be costly uncertainty. This is
especially true when the legal process to arrive at an
agreed amount favors landowners or is protracted. For
example, to assist in the private financing of roads in
Spain, the government has recently re-assumed the risk
of assembling the required land. Private financiers were
no longer willing to take on this risk because courts
were awarding greater amounts of compensation than
forecast.1 A further challenge is that resolving land
issues, including the compensation costs, can be out of
2.4: Understanding and Managing Land Value
step with the planned procurement timetable and be a
significant cause of procurement delay. In India, a gov-
ernment review discovered that at least 70 percent of
190 delayed infrastructure projects had stalled because
of problems over land acquisition, and the compensation
to be paid to landowners was an especially important
factor in these delays.2
“India is one of the most exciting countries for
investing in infrastructure because of the
large investments required. And that is why
we have seen huge capital flows into India’s
infrastructure sector over the past four years.
However there are some issues that need to
be addressed urgently like land acquisition
and the government’s lack of internal capacity
to bid out the contracts that are needed to
meet these investment targets.”
— Luis Miranda, President and CEO, IDFC Private Equity
Public authority for land acquisition is most important
for site-specific infrastructure
46 Whether it is new infrastructure or the expansion of
existing infrastructure, the project may require signifi-
cant land assembly. The powers for compulsory land
assembly (with corresponding compensation) usually rest
with the public sector. These powers are particularly
important for site-speccific infrastructure. For example,
some infrastructure, such as power plants, may not need
to be located on a precise site. As a result, private devel-
opers who already own land that could be developed or
existing landowners have less ability to obstruct the
process. But if the infrastructure project is site-specific
or requires compensation for many landowners, such as
a new road or railway, then it is difficult for the private
sector to take on the risk of assembling all of the parcels
of land at a purely commercial rate. The greatest risk in
this case is that of “ransom” strips of land that are criti-
cal to the project, but that the landowner will not sell or
will sell only at a greatly inflated price.
It can be difficult to capture the benefit from land value
increases—but examples exist
There are examples across the globe where the
link between infrastructure cost and land value increases
have been made. In China and Hong Kong, for exam-
ple, combining the redevelopment of rail stations with
commercial development has meant that the commercial
developer can fund or contribute to the project costs.
The Mass Transit Railway Corporation in Hong Kong
(MTR Corporation Limited) uses a “rail plus property
model,”3 which allows it to augment revenue from rail
services with the financial benefit of development rights
to properties attached to the rail network, thereby inte-
grating the infrastructure and commercial development.
These developments might include residential, commer-
cial office, and retail space.
In London there will be a supplementary tax of
2 pence on business rates to contribute to the funding
of a new UK£15.9 billion Crossrail project (an East-
West train link).4 It is anticipated that this supplement
will raise approximately UK£4.1 billion, or just over 25
percent of the financing needed.
Monetizing land to pay for infrastructure remains an
option and a challenge
Both public and private parties can monetize land to
pay for infrastructure, such as by selling parts of existing
land banks or vacant/underused land to raise funds to
invest in infrastructure. This is typically an option in
urban areas. It has not always been preferred because it
does not result in a sustainable source of finance—there
is a limit to what can be sold—but it has been effective
with a number of different approaches.
This option has been used extensively in China
with the sale or leasing of land parcels on the periphery
of cities to fund infrastructure within the city. For
example, in Changsha, the capital of Hunan Province,
China, approximately 50 percent of the RMB 6 billion
funding for an outer ring road came from the sale of
leasing rights to land strips on either side of the high-
way with access and development approval. In its origi-
nal state, this land had little value.5
In another example, in India a project was launched
in the late 1980s to develop the Bangalore-Mysore
infrastructure corridor.6 The project involves construct-
ing a 111 kilometer tolled expressway between the two
cities and developing five townships with a population
of approximately 100,000 each along the road corridor.
Theoretically, the project can leverage the increase in
land values from the new road and from the township
development to finance the infrastructure. While possi-
bly pioneering in its thinking, the project is still incom-
plete and has been mired in controversy, much of it
around land assembly.7 Nevertheless, it may provide
valuable lessons for other countries wanting to explore
other financing approaches.
Notes
1 Infranews 2009.
2 Livemint & the Wall Street Journal. 2009.
3 MTR 2007.
4 Greater London Authority 2010.
5 Peterson 2006, pp. 5–7.
6 http://www.nicelimited.com.
7 Raghuram and Sundaram 2009.
 2.4: Understanding and Managing Land Value
References
Greater London Authority. 2010. “Crossrail Business Rates
Supplement.” Available at http://www.london.gov.uk (accessed
February 18).

InfraNews. 2009. “Madrid Takes Big Step to Stimulate 2010 PPP

Program.” November 9. Available at http://www.infra-news.com.

Livemint & the Wall Street Journal. 2009. “Land Acquisition Woes
Delay Most Projects.” March 18. Available at
http://www.livemint.com/2009/03/17233745/
Land-acquisition-woes-delay-mo.html.

MTR. 2007. Building Capability: Sustainability Report 2007. Available at

http://www.mtr.com.hk/eng/sustainability/2007rpt/.

Nandi Infrastructure Corridor Enterprises Limited website:

http://www.nicelimited.com.

Peterson, G. E. 2006. “Land Leasing and Land Sale as an Infrastructure-

Financing Option.” World Bank Policy Research Working Paper
No. 4043, November. Washington, DC: World Bank.

Raghuram, G. and S. S. Sundaram. 2009. “Lessons from Leveraging

Land: A Case of Bangalore Mysore Infrastructure Corridor.” IIMA
Working Paper No. 2009-02-04. Ahmedabad, India: Indian Institute
of Management Ahmedabad, Available at
http://www.iimahd.ernet.in/.

47
Part 3
Planning for the Future:
The Way Forward for Private Finance
 3.1: Addressing the Appetite for New Infrastructure
CHAPTER 3.1 There is a widely held belief that private financiers,
particularly private infrastructure funds, are only inter-
ested in investing in projects that are already generating
Adressing the Appetite for New income, and they have no appetite to invest in building
new infrastructure. Indeed, one of the first questions
Infrastructure asked of infrastructure private financiers is whether their
interest lies in greenfield or brownfield assets and
opportunities (see also Chapter 1.1).

Greenfield and brownfield characterizations do not

fully describe the features of interest to investors and
lenders
For many, a preference for greenfield projects implies an
appetite for construction risk, while a preference for
brownfield projects translates to an interest in an existing,
fully operational asset. This distinction is too simplistic
and masks what investors and funders are really looking
for in an opportunity. A recent survey of infrastructure
funds found that 50 percent of funds indicated no pref-
erence in project phase.1
Why is this important? Every government has dif-
ferent infrastructure priorities, whether the focus is on
developing new infrastructure or tackling the renewal,
refurbishment, or expansion of existing assets.
Governments that want to attract private finance need
to know whether the finance is going to be interested 51
in their proposition. If the greenfield vs. brownfield des-
ignation is too broad, they must consider other features
of asset development that will attract or, more impor-
tantly, deter investors and lenders.

The degree of innovation required and historical

performance are as important as how “new” an
asset is
Construction risk can be mitigated through contractual
arrangements, which de-emphasizes the importance of
the project phase in investment. A more important
question is whether new opportunity concerns develop-
ing a new market, such as a toll road where there is no
history of tolling; or if it is about new technology or
design, as in the renewable energy sector; or whether
the approach itself is novel. Brownfield opportunities
may well have a construction element—for example, to
renew or expand existing infrastructure—but there will
already be a track record of the performance and opera-
tion of the asset and its revenue generation. A more rel-
evant terminology would describe infrastructure in three
ways:

• new and tested,

• new and innovative, or
• established.

These terms better address the true nature of the

construction/development risk—that is, can the infra-
structure be built and, more importantly, will it work as
3.1: Addressing the Appetite for New Infrastructure

Table 1: Characteristics of new infrastructure categories

New and tested New and Innovative Established

DEVELOPMENT An existing pool of experienced
contractors is competent to do
the work required.
Contractors are willing to
commit time and price with
substantial liabilities if planned
completion not achieved.
Few or no experienced contractors
are available to do the work
required.
Few contractors are willing to
commit to a time and price
and/or provide performance
guarantees.
This category is not applicable
unless there is an element of
renewal or expansion, in which
case the principles for new but
not innovative or for new and
innovative apply.

TECHNOLOGY Design and materials are tried
and tested, even if they are
applied in a new context.
Untested This category is not applicable
unless there is an element of
renewal or expansion, in which
case the principles for new but
not innovative or for new and
innovative apply.

REVENUE: AVAILABILITY
The start of revenue payments is
only dependent on achieving the
required performance and
availability.
The start of revenue payments There will be a track record of
is dependent on full commission- availability and performance.
ing and achievement of the
required performance and
availability over sustained
period.

REVENUE: DEMAND Demand depends on usage and
the time taken to establish it.
In addition to the risk of usage
and time taken to establish
demand, it also depends on full
commissioning and achievement
of required performance and
availability over sustained period.
There will be a track record
of usage and whether or not
a steady pattern has been
established.

Source: World Economic Forum analysis.

52

planned—and thus the timing of costs and revenues.
Table 1 summarizes the characteristics of these three
new groupings. The simple matrix in Figure 1 show
how these different characteristics might apply to cer-
tain project types.
Taking this theme of development, technology, and
revenue a step further, what follows is a more detailed
commentary on the approach private financiers might
take, as well as some actions to address the issue of
determining the type of infrastructure in which they are
interested.
Development focuses on whether the asset can be
built at the cost and in the time planned
Some of the questions private financiers consider with
respect to design and construction are the following:
• Is there a company with which I can contract to
deliver all of the construction works under a single
agreement?
• Is the contractor competent to perform the work
required? Can the contractor show me examples of
completed work?

“The problem with developing new • How long will it take to complete the work?
infrastructure is there can be a binary result—
it either works or doesn’t—which is why • What recourse will I have if the contractor fails to
investors look for tried and tested approaches complete the work on time?
to be adopted.”
• Is the design tried and tested or is there something
— Stephen Vineburg, Chief Executive Officer, Infrastructure,
CVC Capital Partners novel about it?

• Can I make changes to the design along the way?


Figure 1: Illustrative application of new infrastructure to project characteristics
CARBON CAPTURE PROJECT EXISTING TOLL ROAD WITH LAND WIDENING
New innovative
New known
Established
Development ■ Development
Technology ■ Technology
Revenue ■ Revenue
Source: World Economic Forum analysis
These questions are not just about trying to estab-
lish whether the proposal entails construction risk but
also who will manage it.
A recent review of the delivery of construction
contracts in the United Kingdom’s Private Finance
Initiative (PFI) sector showed that nearly 70 percent of
construction was completed on time; a variety of rea-
sons was cited to explain the 30 percent that were
behind schedule: poor project management, failure of
construction contractor, design changes, and latent
defects, to name a few.2 What this report does not high-
light is who paid for the consequences of the failure to
deliver on time. The expectation is that the construction
contractor paid for this failure; equityholders likely
“lost” earnings during the delay period, and the impact
on debt was probably limited to increased surveillance
costs.
Even extremely complex construction can be pri-
vately financed, as in the case of the recently closed Port
of Miami Tunnel project (see Case Study 8), which is
technically complex, and involved boring of a 5 kilome-
ter tunnel. In fact, one of the reasons the State of
Florida decided on the public-private partnership route
was to bring on partners experienced in this type of
construction. When there are well-established design
approaches, competent and experienced contractors of
sufficient size and willingness to share construction risk,
and well-understood materials and construction meth-
ods, the fact that construction is involved should not in
itself deter private finance.
New technologies can mean greater operational risk
Projects that involve new technologies, such as a new
type of incinerator to generate energy from waste, may
well be a red flag for private finance. If the incinerator
turns out not to work, no energy can be generated from
it and no income received. The cost and time that will
be needed to complete remedial works may be too great
to make the overall project’s economics viable.
Historically, the development of new technologies or
infrastructure sectors has either relied on manufacturers
3.1: Addressing the Appetite for New Infrastructure
NEW TOLL ROAD
New innovative
New innovative
New known
New known
Established
Established
■ Development ■
■ Technology ■
■ Revenue ■
or contractors assuming the risk or has relied on public
funds to develop the first generation.
The problem with relying on manufacturers or
contractors is that they need to be willing to take all the
risk of any performance failures or shortfalls. Such an
approach requires a manufacturer or contractor who can
either put up significant guarantees that investors can
access easily—which may mean they will need to be
insured, bonded, or cash collateralized—or who have
demonstrable financial strength to support corporate
covenants behind contractual guarantees.
Alternatively, the public sector can retain, publicly 53
fund, or support the first generation of a new technology
in order to establish a track record and stimulate the
market. Private finance will then come in to fund future
projects. This can be a more realistic approach. The
publicly funded method is prevalent in the renewable
energy sector. The American Recovery and Reinvest-
ment Act 2009 contains a provision for loan guarantees to
newer technologies,3 and many countries offer “feed-in-
tariffs” to guarantee power prices for renewable energy
around the average market rate.
Revenue considerations extend to availability,
performance, and usage
There are three defining characteristics of project
revenue that are relevant to private investors:
1. Fixed or variable: the revenues are either largely
fixed, and based on the availability of the infra-
structure, possibly with some known perform-
ance measures; or they are variable, based on the
level of usage or volume.
2. Contracted or user-pay based: the revenues are
either contracted, typically over a long period;
or they are based on a user-pays basis, with no
certainty of demand or how they will build over
time.
3.1: Addressing the Appetite for New Infrastructure
Case in Point 1: Transport Infrastructure Finance
& Innovation Act (TIFIA) Funding
The TIFIA act was established in 1998 as a US federal credit
program for eligible transportation projects of national or
regional significance. The program is run under the US
Department of Transportation (DOT), and offers three types of
financial assistance: secured or direct loans, loan guaran-
tees, and standby lines of credit. The goal of the program is
to leverage federal funds by attracting substantial private
and other non-federal investments in a bid to improve the
transportation system in the United States.
Some of the key features of TIFIA credit assistance are
the provision of improved access to capital markets; flexible
repayment terms, such as delayed repayment for up to five
years after construction completion; and potentially more
favorable interest rates than can be found in private capital
markets for similar instruments.
US$122 million has been authorized for each fiscal year
from 2005 through 2009. This level of funding can support
more than US$2 billion of average annual credit assistance.
The amount of federal credit assistance may not
exceed 33 percent of total project costs, and DOT has to
establish a capital reserve to cover expected credit losses
before it can provide TIFIA assistance.
Total TIFIA assistance thus far has been US$7.7 billion,
which has supported projects with a combined cost of US$29
54 billion. The availability of this government support has been
crucial in allowing some projects to reach financial close
during the recent global economic crisis.
Examples of TIFIA assistance include the I-595 corridor
roadway improvement in Florida (TIFIA loan of US$603 mil-
lion), the Port of Miami Tunnel (TIFIA loan of US$341 million),
the Washington Metro Capital Improvement Program (TIFIA
loan guarantee of US$600 million), the Warwick Intermodal
Station (TIFIA loan of US$42 million), and the Central Texas
Turnpike (TIFIA loan of US$900 million).
3. Upfront or periodic payment: revenue receipts are
either receivable in full as soon as the asset is
commissioned or there is a period of build up
over a number of months or years.
The third characteristic is a feature of new market-
based infrastructure, where there is no track record of
usage—such as a new toll road on a new route. This
type of infrastructure requires private financiers to make
an educated guess on the build up and final level of
usage of the asset, as well as on the unit price or toll the
user is willing to pay. The accuracy of these guesses
influences the project’s ability to service debt during this
build-up period, and the overall debt capacity of the
project.
Broadly speaking, the lower-risk revenues are those
that are availability-based with long-term contracts; on
the other end of the risk spectrum are situations that
provide a new service, with patronage building up over
a few years and where revenue is entirely based on user
fees. The higher risk may mean there are fewer potential
investors and those who are interested will seek a higher
return for taking on that risk. Recognizing some of the
challenges of attracting private finance to projects at the
higher risk end of the revenue spectrum is critical. There
are examples of government funding to help mitigate
some of these risks: see, for example, the US TIFIA
funding (see Case in Point 1) and how it was applied to
the Florida I-595 project (see Case Study 9).
An alternative to a solely private financed solution
might be a mixed public and private funding solution.
This approach can raise some complex contractual issues
in order to deal with the inter-relationship between the
two funding sources. However, these issues are not
insurmountable, as illustrated by the approach taken to
fund the Canada Line in Vancouver, Canada (see Case
Study 10).
Debt finance providers view the risks and rewards
differently than equity investors do
We have talked about private finance in general terms,
but there are differences in appetite for new infrastruc-
ture between types of private finance. Commercial
banks, for instance, see new projects as an opportunity
to expand their customer/relationship base, whereas
refinancing existing projects does not offer them these
opportunities.
Although commercial debt is in the most senior or
protected position should problems arise, equity will
need to have been completely written off before com-
mercial debt is at risk. But because debt-holders will
have a far greater total amount of money at risk, their
focus will always be on what can go wrong, what is the
likelihood of these problems, and what can mitigate
them if they do happen. Equity investors are also inter-
ested in these factors, but they will also want to consider
the upside of the project.
As the risk profile of the infrastructure changes over
time, the source and structure of the financing should
be allowed to change as well
It should be expected that an enterprise’s financial
structure will change over the course of its life. Private
financiers willing to take the risk of new or startup
infrastructure may well look to recycle their investment
by selling it to investors seeking established cash flows.
Debt may be refinanced by banks in the capital markets.
When embarking on a procurement it is important to
understand the depth of the potential private finance
market—if it is insufficient or poor value for money—
and consider what needs to be done to encourage more
sources of funding.
 3.1: Addressing the Appetite for New Infrastructure
“Usually an asset’s financing structure
changes over time as the risk reward
proposition changes.”
— Cressida Hogg, Managing Partner, Infrastructure, 3i

To answer the original question of whether private

finance will invest in new infrastructure, the answer is
undoubtedly “yes”, but the range of options and depth
of finance markets will vary greatly over the life of a
project.

Notes
1 Preqin 2009.

2 NAO 2009.

3 World Economic Forum 2010.

References
California Department of Transportation website:
http://www.dot.ca.gov/hq/innovfinance/tifia.htm.

NAO (National Audit Office, United Kingdom). 2009. Performance of PFI

Construction: A Review by the Private Finance Practice, October.
London: NAO. Available at http://www.nao.org.uk/publications/
0809/pfi_construction.aspx

Preqin. 2009. The 2009 Preqin Infrastructure Review. London: Preqin Ltd. 55
TIFIA website: http://tifia.fhwa.dot.gov.

World Economic Forum. 2010. Green Investing 2010: Policy

Mechanisms to Bridge the Financing Gap. January. Geneva and
New York: World Economic Forum USA. Available at
http://www.weforum.org/pdf/climate/greeninvesting2010.pdf.

CHAPTER 3.2
Unlocking the Capital Markets
3.2: Unlocking the Capital Markets
Since 2002, the amount of commercial bank debt
loaned to finance infrastructure has increased steadily
year on year, even through the global economic crisis of
2007–08. During the same period, debt in the capital
markets grew initially before reaching a plateau from
2003 to 2006, followed by a decline. These trends are
illustrated in Figure 1, which shows the total amount of
annual debt arranged for infrastructure projects across
the globe.1 In this chapter we discuss the long-term
trends in capital markets and how to unlock their
potential for infrastructure finance.
A drop in lending to infrastructure PPPs and
concessions reflects the move away from long-term
lending and reliance on monoline guarantees
The upward trend of the infrastructure loans market is a
bit surprising given the current pessimism surrounding the
infrastructure finance markets. Some large transactions—
such as the Gatwick Airport deal—were completed in
late 2009. Looking at the period 1999–2002 seems to
point out the historically cyclical nature of the sector.
These trends do not tell the full story of lending for
infrastructure, which encompasses all sources of lending,
including traditionally short-term debt more commonly
needed for privatizations and acquisitions. Analysis of
PPPs and concessions, which most commonly use long- 57
term lending and rely on the monoline guarantee for
bond issuance, paints a different picture that shows lend-
ing volumes falling markedly in 2009, as shown in
Figures 2 and 3.
Although PPPs and concessions represent only
part of the overall infrastructure market, the data clearly
show the trend. Capital markets bond issuance started
to contract during 2007; bank loans continued to
increase during this period, but then contracted rapidly
during 2009, dropping by just under 25 percent. This
divergence between long-term lending and overall
financing trends is apparent in both bank lending and
bond markets.
The capital and liquidity constraints of banks has led
to reduced capacity, shortened terms, and increased
costs
In many respects, what has happened in the past 18
months has been a retrenchment by banks from long-
term, very cheap lending that characterized the preced-
ing few years. This retrenchment has been driven by
liquidity and/or capital constraints, leading to increased
pricing, shortened terms, and overall reduced lending
capacity.
For example, globally, deal margins in the PPP
sector have more than doubled in the period 2006 to
2009 (see Figure 4). The reduction in loan term has not
been entirely consistent across the banking community,
but a survey of 20 of the leading banks in the UK PPP
3.2: Unlocking the Capital Markets

Figure 1: Infrastructure and Power: Global loans and Figure 2: Total global infrastructure: PPP loans and
bonds, 1999–2009 bonds, 1999–2009

200,000 ● Total Infrastructure and Power loans 60,000 ■ PPP loan amount
● Total Infrastructure and Power bonds ■ PPP bond amount

50,000
150,000

40,000

US$ millions
US$ millions

100,000 30,000

20,000
50,000

10,000

0 0
1999 2001 2003 2005 2007 2009 1999 2001 2003 2005 2007 2009

Source: Dealogic (accessed March 4, 2010). Source: Dealogic (accessed February 3, 2010).

58

Figure 3: Total global infrastructure: Concession loans Figure 4: Deal margins for PPP transactions
and bonds, 1999–2009

50,000 ■ Concession 250

■ loan amount
■ Concession
40,000 ■ bond amount
200
Deal margin (basis point)
US$ millions

30,000

150

20,000

100
10,000

0 50
1999 2001 2003 2005 2007 2009 2004 2005 2006 2007 2008 2009

Source: Dealogic (accessed February 3, 2010). Source: Dealogic (accessed November 3, 2009).
Note: It should be noted that the totals for PPPs and concessions do not
tally directly to the global amounts because some authorities record
transactions as both a PPP and a concession.
 3.2: Unlocking the Capital Markets
Figure 5: Corporate bonds and loans, 2000–09 Figure 6: Bond issuance in the UK water utility sector

5 ■ Loans deal value ● Number of transactions

■ Bonds deal value 6,000 ■ Deal value (proceeds)
30

4 5,000
25

Number of transactions
4,000
US$ millions

US$ millions
3
20
3,000
2
15
2,000

1
1,000 10

0 0 5
2000 2002 2004 2006 2008 2000 2002 2004 2006 2008

Source: Dealogic (accessed February 1, 2010). Source: Dealogic (accessed November 3, 2009).

59

market completed in early 2009 reported “a consistent comparable to other similar investment opportunities.
desire for a shortening of loan maturities.”2 Why aren’t other infrastructure bonds, particularly those
in the PPP and concessions sector, not following a simi-
lar trend?
“Banks are best suited to financing
infrastructure construction periods and then
refinancing in the capital markets.” The infrastructure bond market must overcome a
vicious cycle of declining investment grade projects
— Nick Pitts-Tucker, Former General Manager, Co-Head of Corporate
and loss of credit enhancement and transactional
Banking Group II and Structured Finance Department, Sumitomo
Mitsui Banking Corporation skills from the monoline insurers
Much of the infrastructure bond market, particular for
the PPP and concessions sectors is of low investment
grade. This is steadily exacerbated as credit enhancement
through monolines has fallen away together with the
The corporate bond markets have not witnessed the
transactional skills those monolines bring to the market.
drop in volumes that has occurred with infrastructure
This “vicious circle” is illustrated in Figure 7.
Infrastructure issuance trends differ markedly from cor-
By contrast, the regulated asset base that underpins
porate issuance trends in the capital markets. Corporate
the UK water utility bond issuance helps to secure a
issuance increased in the period 2007 to 2009, and for
better underlying credit rating, between BBB– and A.
the first time since these data began to be captured in
We have identified three challenges that need to be
1995, bond issuance for corporate loans came close to
overcome to reinvigorate capital market interest in infra-
outstripping corporate loans (see Figure 5).
structure projects in developed and emerging
Some pockets of infrastructure bond issuance—such
economies. These are summarized in Table 1. In emerg-
as issuance to UK water utility companies—have con-
ing economies, the list of challenges will grow to
tinued strongly in 2008 and 2009 (see Figure 6). This
include elements such as political instability, uncertain
trend seems to indicate that the capital markets remain
regulatory regime, and undeveloped domestic corporate
an option for structured transactions, in which the
markets. Each of these factors will demand their own
investment proposition, the nature of return, and the
responses.
risk-reward profile are understood by investors and
3.2: Unlocking the Capital Markets
Table 1: Challenges limiting capital markets interest in
infrastructure projects
Challenge Possible response
Underlying opportunities are Obtain a guarantee from monoline
low investment grade insurer.
Change the risk-reward profile to
increase the rating. As part of this
change, the financial structure may
need to reduce the senior debt
leverage, possibly by introducing “first
loss” or subordinated bonds.
Loss of credit enhancement Encourage the re-emergence of the
from monoline guarantees monoline insurers.
Create state-supported substitutes for
monoline insurers.
Loss of transaction skills Build transaction skills in arranging
from monolines banks or a body substituting for
monolines.
60
Substitute or recreate the monoline role
A recurring question is whether to reconstitute the role
of monoline insurers, including their transactional skills.
There appear to be no moves to try and recreate mono-
line bodies. Those monolines that survived the financial
crisis will no doubt rebuild their balance sheets and
consider if and how they will re-engage in the infra-
structure market.
Now there is greater focus on revising project
financial structures with the incorporation of “first loss”
or subordinated bonds. The goal behind this restructur-
ing is to reduce the risk to the senior debt tranche, as
illustrated in Figure 8.
In this model, the amount of senior bonds required
has been reduced and the gap has been filled by subor-
dinated bonds. The senior bonds would continue to be
issued to institutional investors, but the subordinated
bonds would be acquired by specialist investors and
would attract a higher yield than the senior bonds. If
there are any shortfalls in the project financing, these
subordinated bonds would be adversely impacted before
the senior bonds. By creating this first-loss position, the
rating of the unwrapped senior bonds is anticipated to
improve.
Could the regulated price and asset base approach
used for utility companies be more widely adopted?
Regulated infrastructure utilities have continued to be
successful in issuing bonds in the current economic
Figure 7: Vicious circle in the infrastructure bond
sector
e s
nolin I n ve
mo stm
m en
fro ts
ls
ar
kil
el
ow
al
Loss of transaction
i
nves
tment grade
Lo
ss rom
of cre nt f
d eme
mon it enhanc ntees
oline guara
Source: World Economic Forum analysis
climate. Should the regulated price and asset base
approach that underpins the business model for utilities
be adapted for other types of infrastructure, such as
those projects more typically employing a concession-
based approach? A regulated approach is often applied to
existing monopolistic infrastructure networks that may
require capital expenditure over a long period and
where protecting consumer interests is paramount as
consumers have little, if any, choice of supplier. The con-
cession approach is typically used where a single new
asset is being developed but the user/consumer can
choose whether or not to use/pay for it; ongoing capital
expenditure is more for ongoing maintenance rather
than wholesale replacement or upgrade.
From the outset, the concession approach provides
for significant risk transfer to the private sector, which
may result in significant variation in their investment
return. While the regulated regime also transfers risk,
this risk transfer is largely contained within a regulatory
review period. Thus, in some respects, the regulated
approach reduces the long-term risk transfer to the
owner/operator but also limits their investment return.
In considering whether it might be appropriate to
apply the regulated approach to infrastructure more
generally, we highlight some possible challenges, for
example, in the case of a real toll road and a shadow toll
road (see Appendix A.5 for further description).

Figure 8: Subordinated bonds and senior debt tranche
Wrapped senior bonds
credit rating AAA with
underlying rating of BBB
10–15%
Equity 85–90%
Traditional infrastructure
bond finance structure
Source: World Economic Forum analysis, based on proposal described by Hadrian’s Wall Capital.
Real toll road
Real toll roads are open to competition, and consumers
can decide whether or not to use them. The concession
structure passes the risk of non-usage to the private-
sector party. In such cases, market choice should self-
regulate the amount charged to customers. If there is
no comparable alternative infrastructure, a regulated
approach may be more appropriate.
If the project includes building a new asset, then the
concession approach provides for a significant transfer of
the construction cost and time risk from the public to
the private sector.
Shadow toll road
In circumstances where the government pays the conces-
sionaire for the availability and usage of a road (a shadow
toll), the regulated approach has the potential advantage
of ensuring that the government pays only for actual
operating and maintenance costs, and not for the contin-
gency and risk transfer premiums that will be built into
the concessionaire’s price. But this regulated approach
may well lead to future price increases and create poten-
tial budgeting volatility for the public authorities.
In either the case of real toll roads or shadow toll
roads, consideration would also need to be given to the
cost of implementing the regulatory regime and how it
would be applied to what might be a series of fragment-
ed road concessions that represent only a portion of the
total road network.
3.2: Unlocking the Capital Markets
Subordinated
Unwrapped senior bond bonds
with rating of A
10–15%
Equity 85–90%
New infrastructure
bond finance structure
61
A robust approach to long-term financing for
infrastructure is complicated but possible
The overall amount of commercial debt arranged for
infrastructure transactions has proved remarkably resilient
through the global economic crisis. However, the cost of
that debt has increased and the lending terms tightened.
In addition, the provision of certain types of debt—such
as long-term loans and bonds issued through the capital
markets—has declined. We have explored two ways
these markets might be revived: 1) re-engineering of the
project financial structure or 2) introducing new con-
tractual approaches that make the risk-reward equation
more attractive. However, neither approach is a silver
bullet that will solve market problems. More work still
needs to be done at a national or regional level to
ensure long-term financing for infrastructure.
Notes
1 The information throughout this chapter has been sourced from
Dealogic’s database. The Dealogic infrastructure sector group
includes the following sectors: Airports, Bridges, Defence,
Education, Govt Buildings, Hospital, Other, Police, Port, Rail
Infrastructure, Road, Telecom, Tunnel, Urban Railways (including
Light Rail and Mass Rail transit), Waste, and Water & Sewerage.
We have also included in the data information on the
Energy/Power sectors, including renewables. The financing type
includes project finance, privatization, acquisition finance and refi-
nancing.
2 PwC 2009.
3.2: Unlocking the Capital Markets

References
Dealogic. Dealogic database (accessed 2009, 2010).

OFWAT (The Water Services Regulation Authority). “Regulating the

Industry.” Available at http://www.ofwat.gov.uk.

PwC (PricewaterhouseCoopers). 2009. “A Review of Lending Appetite

for Public Private Partnership Financing.” January.
PricewaterhouseCoopers LLP. Available at http://www.pwc.co.uk/
eng/publications/ppp_lending_review.html.

62
 3.3: The Specialization of Infrastructure Funds
CHAPTER 3.3 By some estimates US$100 billion has been raised by
more than 100 infrastructure-focused funds across the
globe.1 Much of this was raised from 2006 to 2008.
The Specialization of Despite fears about the effects of the global economic
crisis and cracks in some transactions, 2009 witnessed
Infrastructure Funds continued fundraising with some significant fund clo-
sures, such as Actis’s US$750 million fund in October
2009.2 But what are the challenges that the sector faces
and how might it develop over the following five years?

There is currently a prevalence of general and private

equity-type funds, first-time infrastructure fund
managers, and funds with a focus on developed
markets
Four elements characterize the current infrastructure
fund market, namely:

• prevalence of general funds,

• dominance of first-time infrastructure fund

managers,

• focus on developed markets, and

• existence of funds based on the structure of a

private equity–type fund.
63

We will discuss these elements in greater detail.

Prevalence of general funds

Recent reviews of infrastructure funds have concluded
that the majority are targeting a range of different sec-
tors,3 as illustrated in Figure 1. The fact that many funds
are allocating capital to energy, transport, water, roads,
and renewable energy suggests that these are the sectors
offering the most investment opportunities. They are
also the sectors that provide assets that best fit the long-
term stable profile that many investors desire.
It would seem that many funds are also targeting
both new and existing transaction opportunities
(although there are limited data here). This might stem
partly from different views on what really differentiates
greenfield and brownfield opportunities (as discussed in
Chapter 1.1).
Many funds are generalists and do not distinguish
between concession contracts and privatizations. One
exception is public-private partnerships (PPP), where
funds have been developed to focus solely on these
types of transactions. Another area is investment in clean
energy infrastructure, where a number of specialized
funds exist.
Many fund managers do specialize around geogra-
phies, such as North America, Asia, or Europe.
3.3: The Specialization of Infrastructure Funds

Figure 1: Infrastructure investment preferences

60
Proportion of funds with preference (%)

50

40

30

20

10

0
Aviation/Aerospace

Bridges

Clean tech/Renewable energy

Defense

Distribution/Storage facilities

Education facilities

Energy

Environmental services

Healthcare/Medical facilities

Logistics

Natural resources

Parking lots

Prisons

Railways

Roads

Seaports

Senior homes

Social (general)

Telecoms

Transportation

Tunnels

Utilities

Waste management

Water
64
Source: Preqin, 2009.

First-time infrastructure fund managers structure, leverage, and information requirements that
As shown in Figures 2 and 3, nearly three-quarters of affect compatibility with the infrastructure proposition.
new fundraising by first-time fund managers is in infra- A particular concern with the leveraged fund approach
structure, but more than half of the funds are held by is the refinancing risk this creates. This will become crit-
managers with more than one fund. Some of the largest ical in coming years, when leverage debt arranged prior
fund managers—such as Macquarie and Highstar to the global economic crisis becomes due for renewal.
Capital—have also raised multiple funds.4 This would It is likely that investors will call for change in the
seem to indicate that investors are starting to recognize model in response to this.
the importance of a track record in infrastructure, not
only to develop well-structured transactions but also to
provide the depth and breadth of resources necessary for “Investors need to be principled in terms of
ongoing asset management. what a fund does and does not do.”
— Hazem Shawki, Managing Partner, EFG Hermes Private Equity
A focus on developed markets
Although fund managers are located across the globe,
most funds seem to focus on North America (Figure 4).
There seem to be fewer and smaller funds raised in Asia
and the rest of the world. Challenges for infrastructure funds include finding
investment opportunities, perceptions of instability,
and unproven track records
Private equity–type fund structure
Some of the challenges confronting current infrastruc-
Many infrastructure funds have relied on the tried and
ture funds are discussed in greater detail below.
tested private equity model that is familiar to many
investors. However, because the market is maturing,
some concerns are being raised around issues such as fee
 3.3: The Specialization of Infrastructure Funds
Figure 2: Unlisted fund managers by number of funds Figure 3: Proportion of fundraising by fund type,
launched 2007 to mid 2009

14%

14%
44% 56%

72%

■ One fund ■ Non–first-time funds

■ Two funds ■ First-time funds
■ Three or more funds

Source: Preqin, 2009.

65
Figure 4: Infrastructure fundraising by primary geographic focus, 2007 to mid 2009

50 — Number of funds 50
■ Fundraising amount

40
40
Number of funds

30
US$ billions

30

20
20

10
10

0
0
North America Europe Asia & rest of world

Source: Preqin, 2009.

3.3: The Specialization of Infrastructure Funds

Figure 5: A Comparison of Macquarie’s Global Infrastructure Index and the FTSE All-World Index, September 2004
to September 2009

300
— Macquarie Global Infrastructure Index
— FTSE All-World Index
Index level rebased (September 30, 2004 = 100)

250

200

150

100

50
September 2004 September 2005 September 2006 September 2007 September 2008 September 2009

Source: Macquarie Global Infrastructure Index.

66
Finding and winning investment opportunities structure and utility assets, has continued to outperform
There is a tension in the market between the rapid rate the FTSE All-World Group index (Figure 5).
of fundraising and the availability of investment oppor- Some infrastructure, such as social infrastructure in
tunities. There are more funds chasing opportunities than partnership with government, is low risk and largely
there are opportunities. There seem to be a number of immune from wider economic activity. However, other
reasons for this mismatch. Despite the apparent pursuit sectors, particularly those that rely on user demand such
of private-sector investment in infrastructure by many as airports, ports, and real toll roads, have seen down-
governments, some major markets seem to be stalled by turns. While the infrastructure proposition may be low
political and social resistance to private finance, as seen risk, this does not mean that over the lifetime of the
in the US social infrastructure market. In response to investment there will not be periods of volatility. This in
the global economic crisis, sellers of assets are holding turn is leading some investors to challenge fund man-
them until they think values have recovered, at least in agers to deliver higher returns on future fundraisings.
part. The shortage of deals is also linked to the unavail- A factor that has affected virtually all transactions
ability of cheap credit to support investment opportuni- has been the impact of low inflation and deflation. Many
ties. For example, in the Gatwick Airport sale in 2009 long-term forecasts for income growth are inflation-
some sellers provided “stapled debt”.5 linked and assume constant inflation over the long term.
This does not create problems if both revenue and costs
Perceptions of instability are linked to the same indices, but as soon as there is a
Some believe that the low-risk-and-stable-return mantra of mismatch, there could be a potential erosion of cash.
the infrastructure offering has been debunked during
the recent economic downturn. There has certainly Many funds are not yet proven
been some instability in the listed infrastructure fund As highlighted above, the majority of infrastructure funds
market, with funds pulled down in value by association are first funds for their respective managers. Although
with their parent. The unlisted model seems to have there is no reason to doubt the competence of these
been largely unaffected, however, and fundraising is managers, this does potentially create some skill capacity
tough but continuing. issues in the industry, particularly given the long-term
Macquarie’s Global Infrastructure Index,6 which nature of the investment. The more-established funds
tracks the stock performance of companies engaged have exhibited a noticeable trend in the last couple
in the management, ownership, and operation of infra- of years of building asset management experience,
developing a more active involvement in the routine
 3.3: The Specialization of Infrastructure Funds
asset management, and bringing more focus to improv- opment rather than existing and established assets. These
ing the operational efficiency of the asset. opportunities present different country-level risks as
well. Fiscal pressures in developed markets may encour-
age governments to go ahead with some infrastructure
The next five years are likely to see more specialized asset sales, thereby weakening the pull effect.
funds, more focus on emerging markets, and an
emergence of retail investment
We believe there will be three main changes in the “Expanding the role of infrastructure funds in
sector in the next five years: emerging markets should be built on strong
local knowledge with local partners.”
• a move to more specialized funds,
—Sadek Wahba, Global Head, Morgan Stanley Infrastructure
• a geographical shift of focus to emerging markets,
particularly BRIC countries, and
• the emergence of retail infrastructure investment.
The emergence of retail infrastructure investment
A move to more specialized funds The experience of retail investors in infrastructure has
As we have highlighted throughout this Report, the so far been very mixed. There are some challenges with
term infrastructure captures many different types of developing this type of investor participation, but it
opportunities, risks, and returns. Given this, it seems seems likely that it will increase. Chapter 3.4 provides
likely that investors are increasingly going to want to more detail about the potential for retail investment in
discriminate among the groups of assets in which they infrastructure.
invest. Funds will likely become more focused on their
propositions and specialize in a particular infrastructure
type, approach, geography, etc. Having this focus should The outlook for the infrastructure fund sector looks
also help address some of the skill gaps, as it will allow positive but the offering to investors will evolve
the development of specialist teams. This specialization The last five years have taken many first-time investors
has already occurred in the PPP market. Much of the in infrastructure up a very steep learning curve. The 67
investment in renewable energy has been undertaken by investment proposition has been severely tested over the
specialist funds. last 18 months, and in most circumstances has demon-
This move to more specialized funds could proceed strated its robustness. Some of the issues that have come
in tandem with a shift from a reliance on the short-term to light, such as volatility of earnings in some sectors,
private equity–type model to much longer term funds, should not be glossed over. Both investors and fund
such as the Union of Mediterranean’s sponsored managers need to spend time to better understand the
InfraMed Fund.7 intricacies of the available opportunities, building skills
across the whole investment life. Overall, the prospects
A geographical shift to emerging markets, particularly for infrastructure funds look more positive as the depth
BRIC countries of experience and level of activity increases.
There seems to be a push-and-pull effect that will accel-
erate the fund activity and investment in countries such
as Brazil, Russia, India, and China (BRIC). Investment is
already happening and a number of specialist funds have
already been established by both domestic and foreign
investors. But this investment is anticipated to increase
significantly through a combination of fewer opportuni-
ties in established markets and a strong pull from the
scale of opportunities available in these emerging
economies. This pull effect is apparent not only in the
size of the potential market but also in the strong belief
that that market is underpinned by a stable political,
legal, and economic environment. There is growing
evidence of a shift to the largely undeveloped markets
found across much of Africa and parts of South Eastern
Asia, such as Vietnam. An example of this is the joint
venture between Morgan Stanley and Orascom
Construction Industries.8
The challenge remains that many of the opportuni-
ties in emerging markets will be focused on asset devel-
3.3: The Specialization of Infrastructure Funds

Notes
1 Based on data from Preqin, 2009.

2 Actis 2009.

3 Preqin 2009.

4 See http://www.macquarie.com and

http://www.highstarcapital.com.

5 Bowman 2009.

6 Macquarie Global Infrastructure Index Series.

7 EIB 2009.

8 InfraNews 2010.

References
Actis. 2009. “Actis Raises US$750 Million for Investment in
Infrastructure across the Emerging Markets.” Actis news,
October 6. Available at http://www.act.is/518,98/.

Bowman, L. 2009. “Infrastructure Funds Show their Staying Power.”

Euromoney, May 05. Available at http://www.euromoney.com/
Print.aspx?ArticleID=2194147 (accessed April 21, 2010).

EIB (European Investment Bank). 2009. “InfraMed Infrastructure Fund.”

Fact sheet, November 18. Available at http://www.eib.org/
projects/pipeline/2009/20090618.htm.

Highstar Capital website: http://www.highstarcapital.com.

InfraNews. 2010. “Morgan Stanley and Orascom in Infra JV for ME and

Africa.” January 28. Available at http://www.infra-news.com/.

Macquarie Global Infrastructure Index Series. Database. Available at

http://www.ftse.com/Indices/Macquarie_Global_Infrastructure_
Index_Series/index.jsp.
68
Macquarie Group website: http://www.macquarie.com/com/index.htm.

Preqin. 2009. The 2009 Preqin Infrastructure Review. London: Preqin

Ltd.

CHAPTER 3.4
Tapping the Retail Investor
3.4: Tapping the Retail Investor
Much of the focus of this Report has been on the role
played by institutional investors, such as pension funds,
in providing equity private finance for infrastructure.
Despite institutional investors dominating the market,
some attention should be paid to the current and
potential role of retail investors.1 In this chapter we will
look at some of the examples of retail investment in
infrastructure that have happened across the globe. We
will consider what lessons can be learned from these
examples and how this investor base can be cultivated.
Serious challenges to retail participation include
educating investors about the risks of the sector and
determining the best approach to market
While to date there has been only limited penetration
of infrastructure opportunities into the retail market,
there are examples where this approach appears to
have been successful. We have summarized a handful of
examples (Table 1) to give some background to the
retail investment proposition and some of the benefits or
issues that have arisen.
Looking across successful and unsuccessful experi-
ences to date, some of the factors that are important to
be addressed are:
• educating retail investors about risk, 69
• considering the financial and political environment,
• deciding on a single asset or a portfolio of investment
opportunities,
• determining when to bring an issue to market, and
• deciding whether to take the listed or the unlisted
route.
Educating a retail investor about risk
This Report has highlighted some of the complexities of
investing in infrastructure and some of the very sector
specific risks that exist. Retail investors need to under-
stand these risks prior to investment; for example, infra-
structure may deliver steady and predictable revenues
when considered over the long term, but that does not
mean that there will not be periods of volatility. Educating
retail investors about the risks seems to be a particular
challenge since many institutional investors are only just
beginning to build a good understanding of the market.
Considering the financial and political environment
Just as institutional investors do, retail investors will
want to understand the context within which the infra-
structure opportunity is being transacted. Countries
with a stable geopolitical environment and high degree
of transparency are more likely to meet retail investor
requirements. This probably helps to explain the Nakilat’s
3.4: Tapping the Retail Investor

Table 1: Examples of infrastructure propositions for retail investment in infrastructure

Example Background Success factors or issues

Municipal bond market, United States
This market represents a major source of private This is a long-established market.
finance for state and local governments. In 2008, issuance
was approximately US$385 billion,1 although this figure The market is supported by exemptions from both
covers a whole range of state and local government state and federal taxes.
financing, not just infrastructure. The market is dominated
by retail investors, either individuals investing directly or
through mutual funds.

Nakilat, Qatar Nakilat (which means “carriers” in Arabic) is a Qatari
shipping company that forms an integral link of the
liquefied natural gas (LNG) supply chain for the State of
Qatar. It was established in 2004 and is a joint stock
company owned 50% by its founding shareholders and
50% by the public as a result of an IPO in 2005.
The development of the LNG industry is an
important part of the development of Qatar’s
economy.
The other shareholders are all bodies of the Qatari
State.

Nakilat is building a large fleet of vessels to transport LNG

produced from Qatar’s North Field, the world’s largest non-
associated gas field with approximately 15% of the world’s
proven reserves, to global markets. By 2010, Nakilat will
own 54 LNG vessels, making it the largest LNG ship owner
in the world.2

IPOs, India There have been a number of IPOs in India in recent years The interest in investing in infrastructure reflects
involving both corporate companies directly involved in the importance the government has placed on
the provision of infrastructure, such as construction spending in the sector.
companies, and those investing in a range of infrastructure
or concession companies. To some degree the model is unproven, as the IPOs
have all been recent.
Most recently, on February 11, 2010, ARSS Infrastructure
Projects Limited was listed on the National Stock Exchange
of India. ARSS is a construction company. Its share offer
70 went 60% to institutional investors, 10% to corporate, and
30% to retail investors. It was heavily oversubscribed—
for example, the allocation to retail investors was 18x
oversubscribed.3

EDF, France In June 2009, EDF, an integrated energy company in EDF targets domestic investors to invest in
Europe, launched a 5-year bond open to private individual domestic infrastructure.
investors in France to help fund EDF’s French investment
program.4 The investment is relatively short term: 5 years.

There is a fixed interest rate of 4.5%.

Railtrack, United Kingdom Railtrack owned the national UK rail network of track, Retail investors had already invested in other
bridges, stations, and signals. In 1994, it was established privatizations in the United Kingdom, such as gas
as a government-owned company; then in May 1996, it and water, so they had a familiarity with this type of
was privatized and listed on the UK stock exchange.5 opportunity.

The shares were launched at UK£ 3.90, but by February 15, But the collapse of company left all shareholders,
1999, were trading at UK£15.51.6 The initial listing both institutional and retail, with a significant loss
provided that at least 30% of the shares go to the public.7 of value of their shares.

Yet, following increased infrastructure renewal costs and

financial penalties for failure to meet performance targets,
in October 2001 it was taken into administration and was
ultimately transferred to Network Rail, a company limited
by guarantee (from the government).8

BrisConnections, Australia
IPO to fund the public-private partnership to develop See Case Study 11: BrisConnections.
$A 4.9 billion road projects in Brisbane, Australia was
popular with retail investors, yet the issue required
further capital contributions that they were unable to
fund. See Case Study 11: Brisconnections.

1 See Chapter 2.3 on municipal bonds.

2 Nakilat website: http://www.nakilat.com.qa (accessed February 12, 2010).
3 NSE website: http://www.nseindia.com. IPO Current Issues at NSE on February 12, 2010.
4 EDF Group website: http://www.edf.com; see also EDR 2009.
5 NAO 2000.
6 UK Parliament, House of Commons 1999.
7 Railtrack Share Offer Prospectus, May 1, 2006.
8 NAO 2004.

success in having retail investors hold 50 percent of its
shares (see Table 1). This was an opportunity with the
full support of the state and of vital importance to the
prosperity of the country. Interest in infrastructure initial
public offerings in India probably reflects the sector’s
strong political support and the large number of works
already in the pipeline.
Deciding on a single asset or a portfolio of investment
opportunities
As we have mentioned, one of the challenges of infra-
structure opportunities is that, while they may deliver a
steady yield when measured over the long term, there
might still be periods of volatility. Given this reality, retail
investment in a single infrastructure asset can emphasize
exposure to risks. The opportunity most suitable for
retail investors is probably one that has an underlying
portfolio of assets, which can dampen volatility and
spread risks.
3.4: Tapping the Retail Investor
between periods of volatility and long-term stable
annuity cash flows, are better understood.
The success of infrastructure-related listings in
India probably also hints at another factor that might
spur growth. Many of the countries and regions with
the greatest demand for infrastructure investment are
ones with high levels of personal savings (often as a sub-
stitute for state welfare support). The challenge here is to
match individuals with savings with infrastructure
investment demand and to develop products that allow
the general public to invest in the development of their
national or regional infrastructure.
Notes
1 For the purposes of this Report, retail investors refers to
individuals investing on their account and for their own benefit.
2 See the Macquarie Funds Group, Macquarie International
Infrastructure Securities Fund, Product Disclosure Statement
dated January 31, 2009, issued by Macquarie Investment
Management Limited.

Determining when to bring an issue to market

Retail investors can be involved either during the estab-
lishment of the infrastructure (at the primary stage) or
once it is all up and running (the secondary stage).
Investing during the primary stage can expose investors
to a greater range of risk, including the risks inherent in
the construction/development of the infrastructure.
Investors will also have no or little return for their
investment during this period, which is likely to be
unattractive. It seems to be a better fit for retail investors
to invest at the secondary stage when there is a more
References
EDF. 2009. “EDF Launches a Bond Issue to the General Public.” Press
release. Paris, May 28. Available at http://press.edf.com/
press-42871.html.
NAO (National Audit Office, United Kingdom). 2000. Ensuring that
Railtrack Maintain and Renew the Railway Network: Report by 71
the Comptroller and Auditor General. HC 397 Session 1999–2000.
April 12. London: NAO.
———. 2004. Network Rail: Making a Fresh State: Report by the
Comptroller and Auditor General. HC 532 Session 2003–2004.
May 14. London: NAO.

established risk profile with an immediate yield.
Deciding on the listed or the unlisted route
A relevant debate is whether it is appropriate for retail
UK Parliament, House of Commons. 1999. Twenty Fourth Report
of the House of Commons The Committee of Public Accounts
on the “Floatation of Railtrack.” June 30. Available at
http://www.publications.parliament.uk/pa/cm199899/cmselect/
cmpubacc/256/25602.htm.

investors to invest in unlisted funds, and/or whether any

fund should invest in unlisted infrastructure. Listed and
unlisted investments have different characteristics, such
as tradability and value volatility (as discussed in
Appendix A.2). These different funds are also subject to
different regulatory regimes. Macquarie’s International
Infrastructure Securities Fund, aimed at retail investors,
will invest only in infrastructure that is expected to be
listed.2

Retail investment will increase as challenges are

overcome
The examples we have highlighted above show that
retail investment in infrastructure opportunities, or
industries inextricably entwined with infrastructure,
can happen successfully in the right circumstances. It
seems likely that the retail role will develop over time;
indeed, as some of the existing unlisted funds develop,
there might be a natural follow-on fund for the retail
market. But the retail sector will probably only grow as
different aspects of the sector, including the dichotomy
 3.5: The Obstacles to Greater Pension Fund Investment
CHAPTER 3.5 There is an obvious match between the long-term
natures of infrastructure and pension funds, which
would seem to make them a “natural fit”. Yet there are
The Obstacles to Greater some fundamental challenges to making this marriage
work. In this chapter we discuss these challenges and
Pension Fund Investment how to overcome them.

There is a financial and philosophical fit between

pension funds and infrastructure finance opportunities
There exists a substantial track record of pension funds
already investing in infrastructure. The government-run
Canada Pension Plan holds 4.9 percent of its C$123.9
billion in infrastructure investments and the Ontario
Teachers’ Pension Plan has infrastructure assets valued at
C$7.9 billion (all valued at 31 December 2009).1
Other major pension funds have reported their
commitment to the sector. For example, in early 2010
CalPERS announced plans to invest around US$1.3 bil-
lion in infrastructure.2 It is estimated that US$24 trillion
is invested in pension funds globally (see Figure 1). Even
if only a small percentage of that amount, say 1 percent,
is invested by pension funds in infrastructure, then that
would represent a potential investment of US$240 bil-
lion.
Beyond the financial rationale, there is also a philo-
sophical fit since pension funds, whether public or private, 73
can be regarded as part of a country’s “national savings”.
Investing in a country’s infrastructure is akin to investing
in its future.
If there is a potentially significant pool of pension
funding that could be invested in infrastructure and a
persuasive philosophical argument to do so, why is
pension fund participation in the market still relatively
small?

Obstacles to pension fund investment include

geographic mismatches, the role of pension trustees,
and positioning by the infrastructure industry
Aside from financial challenges, there appear to be three
main obstacles to pension funds investing in the sector:

• geographic mismatch between pension funds and

infrastructure opportunities,

• role of pension trustees and investment advisors,

and

• failure by the infrastructure industry to explain and

promote the infrastructure proposition.

Geographic mismatch between pension funds and

infrastructure opportunities
Money held in pension funds is not always located
where the investment is needed. For example, 64 percent
of pension funds worldwide are held in the United
3.5: The Obstacles to Greater Pension Fund Investment

Figure 1: Assets under management, 2008

Non-conventional
(alternative)
investment
5 Private wealth

Exchange-traded funds

Private equity

Hedge funds

5
management assets
Sovereign wealth funds

Mutual funds
Conventional
investment Insurance funds
management assets
Pension funds

0 5 10 15 20 25 30 35

US$ trillions

Source: IFSL, 2009.

74
States and only 16 percent are held in countries outside
of the United States, Japan, and a handful of Western
European countries, as seen in Figure 2.
Furthermore, recent surveys by Watson Wyatt,3
reviewing the US$872 billion alternative assets under
management used by the top 100 asset managers on
behalf of pension funds,4 indicated that over 50 percent
of their infrastructure investment was in Europe (Table
1). There seems to be a bias towards investment in
Europe, potentially at the expense of other geographies
that have a greater need for infrastructure investment.
Europe offers a relatively stable political environment, a
largely homogenous legal and economic environment,
and has generally embraced the involvement of private
finance in infrastructure.
Table 1: Infrastructure investment by region
Region Amount invested in infrastructure in region
Europe 54%
North America 30%
Asia Pacific 15%
Other 1%
Source: Watson Wyatt, 2009a, 2009b.
It is surprising that the amount invested in infra-
structure by these top 100 managers is not greater. The
survey found in 2008 that only 9 percent of the alterna-
tive assets were invested in infrastructure (Table 2).
Table 2: Investments in alternative asset classes
Subdivision of alternative asset class Percent invested
Real estate 58%
Private equity fund of funds 20%
Fund of hedge funds 13%
Infrastructure 9%
Commodities negligible
Source: Watson Wyatt, 2009a, 2009b.
So what seems to be holding back greater investment by
pension funds?
The role of pension trustees and their advisors
An important factor that is little discussed is the role
of the pension trustees and their advisors. The trustees
work on behalf of the pension fund beneficiaries to
oversee the fund’s investment strategy and implementa-
tion. Despite this important role, many trustees are not
necessarily investment experts, and a number may well
be employees of the entity that has its pensions in the
fund. This can have two consequences. First, the trustees
are very reliant on their investment advisors and second,
they have a natural inclination to stick with more tradi-
tional, easy-to-understand investment assets such as gov-
ernment bonds or equities. If they are to diversify into
the alternative asset class, then they will be reliant on
their investment advisors to explain to them the risks
and rewards of an infrastructure opportunity. While
there are a number of such advisors who have built up
their infrastructure knowledge, there are undoubtedly a

Figure 2: Proportional share of sources of pension fund assets at end of 2008
>1%
2% 1%
3%
3%
11%
16%
64%
Source: IFSL estimates based on IFSL, 2009.
large number, often in the smaller advisory practices,
who have not. Thus the relative lack of interest in
and/or knowledge of the sector by these advisors
becomes an impediment to pensions making the move
to invest in infrastructure opportunities.
Failure by the infrastructure industry to explain and
promote the infrastructure proposition
A small but significant number of pension funds have
built up considerable expertise in the market with spe-
cialist teams transacting and managing investments
directly, as illustrated by the funds highlighted earlier in
the chapter. But the fact remains that there are many
more pension funds that have little, if any, expertise. For
these funds infrastructure as an asset class remains a
niche within an alternative investment niche. Against
this infrastructure deficit, there seems to be a need for
the industry itself to do more to promote itself to the
broader pensions community.
The pension sector is not a homogenous group of
investors, but there are some clear trends in the types of
investments they are seeking and the industry needs to
more fully understand them.
3.5: The Obstacles to Greater Pension Fund Investment
■ United States
■ Other
■ United Kingdom
■ Japan
■ Netherlands
■ Switzerland
■ Germany
■ France
75
The financial deterrents to pension fund investment
include illiquidity, lack of immediate yield, lack of
linkages, and lack of opportunities for smaller pension
funds
In addition to the general deterrent factors highlighted
above, there are some more specific financial concerns
that may be deterring pension investors. Some of these
have been brought into the limelight in the recent eco-
nomic downturn.
Illiquid investments
Infrastructure investments are generally illiquid; they
cannot be readily bought or sold, so holding them can
create issues in volatile markets. In 2008 during the
economic turmoil, when equity values fell rapidly many
infrastructure values held up well. What appeared a good
thing actually created a number of fund management
issues. Some funds found the percentage of total value
held in infrastructure breached allocation limits, but they
could not speedily reduce their exposure to correct this.
The lack of yield
Pension funds are continuously trying to balance their
assets with their liabilities to current and future benefici-
aries, and for that reason they need to make investments
that give them an immediate return or yield. This means
that exposure to expensive and uncertain bidding
processes and the time required for asset construction
are incompatible with their need for yield. This in effect
means that they are limited to investing in funds that are
3.5: The Obstacles to Greater Pension Fund Investment

already generating distributions or to investing directly

in existing, fully operational infrastructure.

Not always index linked

Many pension fund liabilities are index linked, typically
to a national consumer price index, and so they seek
investment opportunities that also provide index-linked
returns. However, there is a limited pool of infrastructure
investments that have an explicit index link.

The size of investment

The pension fund community includes a significant
number of small funds with investment allocations that
are insufficient for infrastructure. For example, in the
United Kingdom there are approximately 2,500 pension
funds, of which approximately 1,000 are managing
funds of less than UK£5 million; only 190 are manag-
ing funds of more than UK£1 billion.5
Pension funds also provide debt to infrastructure
projects, but in the past this has often relied on mono-
line insurance. The decline of the monoline insurers has
led to a decline in debt offerings.

Notes
1 See the websites of the Ontario Teachers’ Pension Plan, at
http://www.otpp.com/wps/wcm/connect/otpp_en/home/
76 investments/inflation+sensitive/infrastructure, and the CPP
Investment Board, at http://www.cppib.ca/Investments/
Inflation_Sensitive_Investments/infrastructure.html.

2 CalPERS is the Californian Public Employees’ Retirement System.

The increased funding to infrastructure was reported by a number
of sources, including Diamond’s article in Pensions & Investments
(Diamond 2010).

3 Watson Wyatt 2009a, 2009b.

4 Alternative assets are taken to mean investments in hedge fund

of funds, real estate, private equity fund of funds, infrastructure,
and commodities.

5 Pension Funds Online, available at

http://www.pensionfundsonline.co.uk.

References
CPP Investment Board website: http://www.cppib.ca/Investments/
Inflation_Sensitive_Investments/infrastructure.html.

Diamond, R. 2010. “Investments: CalPERS Set to Invest $1.3 Billion in

Infrastructure.” Pensions & Investments, March 15. Available at
http://www.pionline.com/article/20100315/DAILYREG/100319934.

IFSL (International Financial Services London). 2009. IFSL Research:

Fund Management 2009. October. http://www.ifsl.org.uk/
output/ReportItem.aspx?NewsID=47.

Ontario Teachers’ Pension Plan website: http://www.otpp.com/

wps/wcm/connect/otpp_en/home/investments/inflation+sensitive/
infrastructure.

Pension Funds Online, available at www.pensionfundsonline.co.uk.

Watson Wyatt. 2009a. Global Alternatives Survey, July. Available at

http://www.towerswatson.com/GAS2009.

———. 2009b. Global Pension Assets Survey, January. Available at

http://www.watsonwyatt.com/asia-pacific/localsites/korea/
Ideas_and_Research/Business_Issues/Data/
2009GlobalPensionStudy.pdf.
 3.6: Government as Provider and Facilitator of Finance
CHAPTER 3.6 The global economic crisis has seen parts of the private
finance offering virtually disappear; for example, the capi-
tal and commercial bank debt markets have become
Government as Provider and severely constrained in the amount and terms of their
lending. This has meant that governments have become
Facilitator of Finance the lender of last resort in many circumstances. In parallel
with this responsibility, governments have also put in place
a range of measures to try to support and stimulate the
provision of private finance, primarily in the debt market.

Government measures to support and stimulate private

finance have benefits but create issues
Government measures to support and stimulate private
finance include:

• up-front payments,
• direct co-lending,
• direct guarantees, and
• indirect guarantees.

The following is a brief description of what these

measures may entail, followed by a summary of some
of the benefits and issues of the different approaches
(Table 1).

Government up-front payments 77

Up-front payments take the form of either direct capital
contributions toward project costs or the provision of
necessary but separate infrastructure (thereby reducing
the private finance need)—for example, passenger
stations for a new rail line.

Direct co-lending
Governments can co-lend alongside commercial banks
on the same commercial terms—for example, the
United Kingdom set up the Treasury Infrastructure
Finance Unit, in early 2009 (see Case in Point 1 in
Appendix A.4). The main purpose of this approach is to
bridge the difference between available commercial debt
and a project’s funding needs.

Direct guarantees of debt

Governments may guarantee a proportion of commercial
debt. This approach is aimed at reducing project risk—
such as construction and/or revenue risk on a demand-
based project. This has been used in France, Portugal,
and Spain.

Indirect guarantees of debt

Rather than providing a direct guarantee of the com-
mercial debt, governments may provide guarantees that
are contingent on the outcome of future events. For
instance, if a local government party defaults, the nation-
al government will support its obligations or guarantee
the amount of debt paid if a partnership or concession is
terminated.
3.6: Government as Provider and Facilitator of Finance
Table 1: Government measures to stimulate the involvement of private finance
Benefits
Up-front payments: • Reduces private-sector funding requirement
Capital contributions • Provides access to cheaper public funding
• Risk transfer is relatively undisturbed if used in
moderation
Direct co-lending
• May be quickly implemented
• Retains structure of envisaged transaction
• Reversible in better credit markets
Guarantees: Direct • Might assist project affordability
Guarantees: Indirect • May attract new debt to the market (as investors
may regard it as quasi-sovereign debt with no
direct project risk)
• Should help with pricing
1 Moody’s Investor Service 2009.
Source: World Economic Forum analysis.
78
“It will be interesting to see if the economic
crisis catalyses governments within regions to
work more closely together to pool their
resources—whether finance or know how.”
— Rashad Kaldany, Vice President, Asia, Eastern Europe, Middle East
and North Africa, International Finance Corporation
Responses have occurred at the regional and
multilateral levels as well
The response to the crisis has not rested with individual
governments acting alone; there have also been regional
and multilateral responses. For example, in 2009, the
International Finance Corporation (IFC) established
an Infrastructure Debt Crisis Fund for public-private
partnership (PPP) projects (see Case in Point 1: IFC
Infrastructure Crisis Facility).
In Europe, the European Investment Bank (EIB)
instituted a €6 billion increase in funding of energy,
carbon capture, infrastructure, and clean transport
projects for each of the years 2009 and 2010.1 The EIB
was also behind the September 2009 launch of the
Marguerite Fund,2 which aims to raise €1.5 billion to
invest in environmental, energy, and transport infrastruc-
tures. Cornerstone investors in this Fund are the French
Caisse des Dépôts (CDC), Italy’s Cassa Depositi e
Issues
• Increased operating leverage
• Difficulties refinancing public-sector support
• Need to consider carefully the impact on any debt
rating1
• Does not deal with increased debt costs
• Requirement for government lending
skills/operation
• Potential conflict of interest to manage
• Investor and private funder issues to consider
• UK model provides only liquidity not better terms
• Leaves government with the challenge of how to
dispose of stakes
• Helps credit capacity and debt costs but not
liquidity issues
• Benefit may be limited by the widening of
government spreads
• Leaves government with contingent funding
requirement (at default or termination)
• Leaves government with contingent funding
requirement
Prestiti (CDP), the KfW Bankengruppe (KfW) of
Germany, and the EIB.
Enhancements to established support mechanisms
have been instituted
For a number of countries, the response to the global
economic crisis has not led to the introduction of com-
pletely new approaches but rather to the improvement
of existing programs and initiatives. For example, India
already had in place a Viability Gap Funding scheme
(see Case in Point 3) to assist with the financing of
important projects that are commercially untenable. In
the United States, the existing TIFIA funding program
(see Case in Point 1: TIFIA Funding in Chapter 3.1) has
been expanded and the model used to develop
Transportation Investment Generating Economic
Recovery (TIGER) funds. In Canada, the P3 Canada
Fund was launched (see Case in Point 2: PPP Canada).
There are also examples of governments responding
to the crisis by removing known deterrents to private
finance. For example, in Spain the government recently
announced that they will assume the risk of the cost of
land acquisition for road PPP projects.
There is also the question of how much finance
may come from sovereign wealth funds (SWFs; see
Chapter 3.4). It is estimated that total assets under SWF
management are valued at US$3.5 trillion with funds
representing half of those assets making some investment
in infrastructure.3 Establishing the extent of the actual
 3.6: Government as Provider and Facilitator of Finance
Case in Point 1: IFC Infrastructure Crisis Facility Case in Point 2: PPP Canada

The International Finance Corporation (IFC) launched the
Infrastructure Crisis Facility (ICF) in April 2009. It created a
pool of both debt and equity financing for infrastructure
projects in developing countries whose viability was
threatened by liquidity problems caused by limited private
participation resulting from the global economic crisis. In
addition, funding is available for advisory services.
By October 2009, pledges of US$4 billion had been
made by International Financial Institutions (IFIs) for a debt
pool, and the first loan had been made to a port project in
Vietnam. This debt pool facility is managed by Cordiant
Capital Inc.
IFC provided US$300 million to the fund. DEG, the
German development finance institution, has earmarked
US$400 million to co-finance programs under the ICF, in
addition to €500 million set aside previously by KfW for the
debt pool. PROPARCO pledged €200 million to the ICF debt
pool for projects in Africa, after earlier committing €800
million in co-financing. The European Investment Bank (EIB)
committed €1 billion in co-financing.
In September 2009, the Government of Canada established
PPP Canada to support the development of public-private
partnerships (P3) by working with both public- and private-
sector parties and to serve as a center of excellence and
federal focal point for P3s. At the same time, they established
a C$1.2 billion fund aimed at developing the market for proj-
ects procured by the public procurement partnership route
or the alternative finance procurement route followed by
some provinces.
The amount of the funding support, in combination with
any other direct federal assistance, may not exceed 25 per-
cent of the project’s direct construction costs. In addition,
the level, form, and conditions of any funding support will
vary depending on the needs of a given project.
Eligible projects are for the construction, renewal, or
material enhancement of public infrastructure that achieve
value for the public, develop the P3 market, and generate
significant public benefits.

79

Case in Point 3: Viability Gap Funding scheme in India

Overview of projects costs. If required, an additional 20 percent can

India’s Viability Gap Funding (VGF) scheme was established in be made available by the sponsoring Ministry or Agency.
2006 for competitively bid infrastructure projects where the The Government of India funding will normally be a capital
economic benefits could be demonstrated but the financial grant during construction;
returns were below investor thresholds. The scheme provides
funding in the form of grants to meet the gap for making a • funding is to be disbursed after the private-sector company
public-private partnership (PPP) project commercially viable. has subscribed and invested its equity contribution;
As of March 2009, 139 projects have been approved with a
capital investment of Rs 118,830 crore (approximately US$25.97 • funding will be released in proportion to the disbursement
billion) and a VGF commitment of Rs 38,993 crore (approximately of the remaining debt; and
US$8.52 billion).
The sectors covered under the scheme include power, • funding will be released through the lead financial institution.
transportation (roads, railways, seaports, airports), water
supply/sewerage, and international convention centers. The
Financial overview
key features of the VGF scheme are that:
A revolving fund of Rs 200 crore (approximately US$43.3 million)
is provided by the finance ministry to the empowered institution.
• funding can take various forms, including but not limited to
The empowered institution then disburses funds to the respec-
capital grants, subordinated loans, support grants, and
tive lead financial institutions and claims reimbursement at that
interest subsidies;
point from the Ministry of Finance.
An Empowered Committee in the Department of Economic
• funding is disbursed contingent on agreed milestones and
Affairs will consider and authorize funds up to Rs 50 crore
will be available in installments;
(approximately US$10.8 million), beyond which the approval of
the finance minister will be required.
• funding by the Government of India is limited to 20 percent
3.6: Government as Provider and Facilitator of Finance

Table 2: Approaches taken by various state infrastructure banks and their impact on infrastructure financing
Bank Remit for infrastructure finance Impact on infrastructure financing

European Bank of Reconstruction
and Development (EBRD)1
Describing itself as a “transition bank,” the EBRD was
established in 1989 to support the financing of projects in
Central Europe and Central Asia that serve the transition
to market economies and pluralistic democratic societies.
It is owned by 61 countries as well as the European
Community and European Investment Bank.
It has a capital base of €20 billion and supports
infrastructure projects in a range of sectors including
transport, environment, energy, and shipping.
It is difficult to establish a precise number for the amount
spent on infrastructure as it is spread across a number
of sectors.
In 2008, the EBRD provided the following funding:
1. Municipal and environmental infrastructure: €279
million
2. Transport: €660 million

It primarily supports projects in the private sector.

Development Bank of South Africa
(DBSA)2
Established in 1983 by the South African government,
the DBSA plays a number of roles to support the funding
of physical, social and economic infrastructure in
South Africa and the Southern Africa Development
Community region. These roles are described as Financier,
Partner, Advisor, Implementer, and Integrator.
Its portfolio is split approximately 75:25% between public-
sector projects and infrastructure funded through private-
sector intermediaries.
It is difficult to establish a precise number for the
amount spent on infrastructure as it is spread across a
number of sectors.
In 2009, the DBSA provided total funding, both equity
and loans, of Rand 9.3 billion creating a total portfolio
of Rand 20.48 billion. Of this, approximately 15% went to
road and drainage projects, 8% to other transport, and
21% to water projects.

The Brazilian Development Bank The BNDES is a federal public company established in It is difficult to establish a precise number for the
(BNDES)3 1952 linked to the Ministry of Development, Industry and amount spent on infrastructure as it is spread across a
Foreign Trade. number of sectors.

It aims to provide long-term financing to enhance Brazil’s In 2008, BNDES’ total disbursements were R$92.2
development and the competitiveness of Brazil’s economy, billion, of which R$35.1 billion (38%) went to the
including large-scale industrial projects and infrastructure. infrastructure sector. This includes R$13.8 billion to
80
roads/highways and R$8.6 billion to electric power.
In the infrastructure sector, much of its current focus is
aimed at the energy sector, including renewables,
logistical bottlenecks including access to ports, expanding
the telecommunications network, and developing urban
infrastructure.

(cont’d.)

investment in infrastructure can be difficult because

many SWFs do not report their holdings publicly. The
Abu Dhabi Investment Authority (ADIA), one of the
largest SWFs, has infrastructure investments representing
between 1 percent and 5 percent of their portfolio.4
They recently acquired a 15 percent stake in Gatwick
Airport from Global Infrastructure Partners.5 SWFs are
also concentrated, by number and value, in Asia and
the Middle East, where there is significant demand for
infrastructure investment, so these funds offer a better
geographic fit than pension funds do.
“The question for state or national infrastruc-
ture banks is whether their aim is to substitute
private finance or provide an additional source
of finance either to wholly fund projects or
fund alongside commercial providers.”
— Richard Abadie, Partner, PricewaterhouseCoopers LLP
There appears to be impetus in many countries to set
up state infrastructure banks
Given the change in many governments’ role for the
financing of infrastructure, many countries have revisited

Table 2: Approaches taken by various state infrastructure banks and their impact on infrastructure financing (Cont’d.)
Bank Remit for infrastructure finance
KfW Bankengruppe (KfW)4 KfW is owned by the Federal Republic (which also
guarantees it) and Lander (federal states) of Germany.
It was established in 1948 as part of the post-war
reconstruction effort. Today it describes itself as a
promotional bank and it supports economic, social, and
ecological development in Germany and worldwide as is
an advisor to the German federal government.
State Bank of India (SBI)5 The SBI is the largest commercial bank in India, both in
terms of its geographic reach and its balance sheet size.
It is a public-sector bank with the Government of India
having a majority shareholding (approximately 60%). It is
listed on Indian stock exchanges.
1 EBRD website: http://www.ebrd.com and the EBRD Annual Report 2008.
2 DBSA website: http://www.dbsa.org and DBSA Annual Report 2008/09.
3 BNDES website: http://www.bndes.gov.br and Annual Report 2008.
4 KfW website: http://www.kfw.de and Annual Report 2008.
5 SBI website: http://www.statebankofindia.com.
6 Macquarie website: http://www.macquarie.com.au; Macquarie Press Release 2009.
7 PFI 2010, p. 48.
the question of whether they should establish state infra- Table 3: State Bank of India lending amounts in FY 2008
structure banks (either state-owned or state-sponsored). and FY2009
Consequently, we have reviewed some of the existing
Amount (Rs crores)
state infrastructure banks and have summarized in Table
Aggregate project
2 the range and impact of approaches that have been cost of projects
taken (see also Table 3). In the United States, the 2011 sanctioned
budget sets out plans for a US$4 billion National Aggregate debt
requirement
Infrastructure Innovation and Finance Fund.6 In the
Of the above,
United Kingdom, the Liberal Democrat political party
debt sanctioned
has also been calling for the establishment of the UK by SBI
Infrastructure Bank.7 Debt syndication
Source: http://www.statebank.com/.
3.6: Government as Provider and Facilitator of Finance
Impact on infrastructure financing
While KfW is not solely focused on infrastructure,
lending to the sector does form a part of its remit.
It is difficult to establish a precise number for the
amount spent on infrastructure as it is spread across a
number of sectors and banks within its group. It lends
to all types of infrastructure across the globe. For
example, in 2008 it committed a total of €340 million to
invest in renewable energies (other than large-scale
hydro), which was more than the World Bank in the
same period. It also plans to lend a total of €3 billion for
municipal and social infrastructure in Germany in 2009
and 2010.
As with other banks it is difficult to establish precise
numbers of lending to the infrastructure sector.
However, this was primarily done through SBI’s Project
Finance SBU.
This unit completed the following lending in 2008 and
2009 (see Table 3):
In 2009, the SBI established a US$1.04 billion private
equity fund with Macquarie Capital, with the IFC a
minority shareholder and cornerstone investor, to
invest in infrastructure in India.6
The SBI also topped the 2009 Project Finance
International League Tables as the Global Initial
Mandated Lead Arrangers, having arranged US$19.9
billion for 37 deals in 2009.7
81
FY 2008 FY 2009 Growth (%)
1,45,045 1,93,595 n/a
92,558 1,33,894 n/a
20,195 25,854 28.0
54,951 64,069 16.6
3.6: Government as Provider and Facilitator of Finance

Notes PPP Canada. 2008. Summary Amended Corporate Plan 2008 to 2012,
Summary Amended Operating and Capital Budgets 2008.
1 EIB 2008.
Available at http://www.p3canada.ca/_files/file/P3C_Corporate_
2 EIB 2009. Plan.pdf

3 Preqin 2010. Preqin. 2010a. The 2010 Preqin Sovereign Wealth Fund Review.
London: Preqin Ltd.
4 ADIA 2010.
———. 2010b. “Preqin Research Report: Sovereign Wealth Funds.”
5 InfraNews 2010. Factsheet. Available at http://www.preqin.com/docs/reports/
Factsheet_-_SWF_2010.pdf.
6 GPO 2010.
Vincent Cable. 2009. “Vince Cable Launches Liberal Democrat
7 Vincent Cable 2009.
Proposals for a National Infrastructure Bank.” November 25.
Available at http://www.vincentcable.org.uk/news/001619/
vince_cable_launches_liberal_democrat_proposals_for_a_national_
infrastructure_bank.html.
References
ADIA. 2010. “By Asset Class.” Portfolio Overview: Investments.
Available at www.adia.ae/En/Investment/Portfolio.aspx (accessed
March 23, 2010).

Cordiant Capital. 2009. “Cordiant Capital to Manage New Infrastructure

Crisis Facility Debt Pool.” Press Release. December 1. Available
at http://www.cordiantcap.com/en/news/Release_Cordiant_ICF_
011209.pdf.

EIB (European Investment Bank). 2008. “EIB Directors Approve Anti-

Crisis Measures for 2009–2010.” Press Release 2008-159-EN,
December 16. Available at http://www.eib.org/infocentre/press/
index.htm.

———. 2009. “Europe’s Leading Public Financial Institutions Agree

upon the Marguerite Fund and Welcome Two European Founding
Investors, “Core Sponsors.” Press Release 2009-171-EN,
September 4. Available at http://www.eib.org/infocentre/press/
index.htm.

GoI (Government of India). 2005a. “Viability Gap Funding for

Infrastructure.” Economic Survey 2004–2005. Available at
82 http://indiabudget.nic.in/es2004-05/infra.htm.

———. 2005b. “Scheme for Support to Public Private Partnerships in

Infrastruture,” July. GoI, Ministry of Finance, Department of
Economic Affairs. Available at http://www.pppinindia.com/pdf/
PPPGuidelines.pdf.

———. 2009. “Private Participation in Infrastructure.” The Secretariat

for the Committee on Infrastructure, June. The January 2010
version is available at http://infrastructure.gov.in/pdf/
Infrastructure.pdf.

GPO (Government Printing Office). 2010. Budget of the US

Government: Fiscal Year 2011. February 1. Washington, DC: GPO.
Available at http://www.gpoaccess.gov/usbudget/.

IFC (International Finance Corporation). 2009. “Vietnamese Port among

Emerging-Market Infrastructure Projects to Benefit from Crisis
Facility.” Press Release, October 5. Available at http://www.ifc.org/
ifcext/media.nsf/content/SelectedPressRelease?OpenDocument&
UNID=C054F1667BBBA38F852576460056314F.

———. IFC Infrastructure Crisis Facility website: http://www.ifc.org/

ifcext/about.nsf/Content/FinancialCrisis_ICF (accessed March
2010).

InfraNews. 2010. “Abu Dhabi SWF Acquires 15% of Gatwick Airport.”

InfraNews. February 5. Available at http://www.infra-news.com.

Macquarie. 2009. “SBI and Macquarie Launch Indian Infrastructure

Fund: US$1.037 Billion Raised.” Press Release, April 6.

Moody’s Investor Service. 2009. Moody’s Global Project Finance

Methodology Update Report: Public Sector Capital Contributions
to Funding PFI/PPP/P3 Projects. November. Available at
http://www.pppcouncil.ca/pdf/moodys_milestone_112009.pdf.

PFI (Project Finance International). 2010. PFI e: PFI Issue 424: January
13, 2010. Available at http://www.pfie.com/pubindex/
pfi-424-january-13-2010/2559.issue.

Podkul, C. 2009. “Crisis Management.” Infrastructure Investor 3

(June): 13.

PPP Canada website: http://www.p3canada.ca/home.php.

Part 4
Case Studies
 Part 4: Case Studies
List of Case Studies

Part 4 is a collection of 11 case studies from around the world that illustrate various outcomes—successful or
otherwise—for different financing approaches. Included are the following studies:

Case Study 1: Delhi International Airport Ltd.

Public Private Partnership for Critical Infrastructure

Case Study 2: The Cross City Tunnel

The Challenge of Long-Term Forecasting

Case Study 3: Lekki Toll Road Concession

Arranging Local Financing

Case Study 4: Ontario Highway 407 Toll Road

Best Practices in Dispute Resolution

Case Study 5: Port of Baltimore, Seagirt Marine Terminal 85

Long-Term Revenue Sharing Agreement

Case Study 6: Chicago Skyway

Long-Term Concession of a Real Toll Road

Case Study 7: Doraleh Container Terminal

Multilateral Support Building

Case Study 8: Port of Miami Tunnel

Public Private Partnership for a Technically Challenging Project

Case Study 9: Florida I-595 Road Project

Arranging Financing During an Economic Crisis

Case Study 10: The Canada Line

Combining Public and Private Finance

Case Study 11: BrisConnections

A Cautionary Tale of Retail Investment in Infrastructure
Case Study 1: Delhi International Airport Ltd.

Delhi International Airport Ltd.

P U B L I C - P R I V AT E PA R T N E R S H I P F O R C R I T I C A L I N F R A S T R U C T U R E

The contractual approach was designed to meet OVERVIEW

the government’s aims of retaining a degree In 2006, following a competitive bidding process, the
Government of India awarded the Delhi International
of influence over a major infrastructure asset
Airport concession to the Delhi International Airport
while securing a private partner to undertake a Private Limited (DIAL) with a mandate to operate,
major modernization of the facilities, including maintain, develop, design, construct, finance, upgrade,
and modernize the Indira Gandhi International Airport,
operations and associated finance-raising Delhi, for a period of 30 years until 2036, with a further
option to extend the concession by 30 years. The con-
cession master plan describes five phases of development
of the airport. The first phase will require a capital
Fast facts
investment of US$2 billion and will be completed prior
to Delhi hosting the Commonwealth Games in October
Size Rs 102.25 billion
2010.
Date 2006
86 Location New Delhi, India
KEY STAKEHOLDERS
Type Economic
The Airports Authority of India (AAI) has a 26 percent
Approach Public-private partnership
stake in DIAL and is the designated public body for the
Phase Existing and established project. The AAI is a public-sector body wholly owned
by the Government of India. The AAI was constituted
Market Developing in April 1995 by merging the erstwhile National
Airports Authority (NAA) and International Airports
Authority of India (IAAI) with a view to accelerating
the integrated development, expansion, and moderniza-
Finance
tion of the airports in the country to conform them to
international standards.
Private-sector shareholders have a 74 percent stake
in DIAL. The original constituents were:
Equity
Lease income 24%
27% • GMR Group: The consortium leader, with a 50.1
percent equity stake (54 percent stake in February
2010)
Commercial debt
49% • Fraport AG: A German airport company, with a 10
percent equity stake

• Malaysia Airports Holdings: A Malaysian airport

Rs 102.25 billion
company with a 10 percent equity stake

• Infrastructure Development Finance Company Ltd.

Private Equity (IDFC PE): Financial investor, with a
3.9 percent equity stake (nil in February 2010)
 Case Study 1: Delhi International Airport Ltd.
Delhi International Airport Ltd.
P U B L I C - P R I V AT E PA R T N E R S H I P F O R C R I T I C A L I N F R A S T R U C T U R E

Structure

GMR Group

(had a 50.1% stake at financial close)

IDFC PE Malaysian Fraport GMR Group

airports Airports Authority
(had a 3.9% stake of India (AAI)
at financial close) 10% 33.3% 54%
87

nt a nd lease
Private-sector Public-sector
shareholders

eeme
shareholders

26% share*

gr
74% share

na
sio
Regulatory framework
es

• Ministry of Civil Aviation nc

Co
• Directorate General of Civil
• Aviation
• Airports Economic Regulatory
• Authority
• Bureau of Civil Aviation Security Dehli International Domestic Commercial
Airport Pvt. Ltd. (DIAL) Bank Group

Government of India
• Tariff Foreign Commercial
• License Airport operator Bank Group
• Right of first refusal Fraport
• Customs, security
• and immigration

Cargo operator

State government support

• Utilities Airport users:
• Surface access Design & Build contracts Airlines, concessionaires,
• Additional land (project management consultant) government agencies
• Clearances

■ Public sector ■ Equity investors and shareholders ■ Project company and related parties ■ Debt providers

* Shares in name of AAI

Case Study 1: Delhi International Airport Ltd.
Delhi International Airport Ltd.
P U B L I C - P R I V AT E PA R T N E R S H I P F O R C R I T I C A L I N F R A S T R U C T U R E
FINANCIAL OVERVIEW
A summary of the sources and uses of funds is shown in
the table below:
• The leverage ratio of debt to equity is 1.25:1.
• An annual fee of 45.99 percent of the gross revenue
is paid to the AAI. This amount was bid by DIAL as
part of the competitive tendering process.
• An annual performance fee is payable to airport
operator Fraport.
• DIAL has arranged a 17-year commercial debt split
between the Indian domestic bank group (75 per-
88 cent) and external or foreign debt (25 percent). This
split is to reflect the mix of DIAL’s revenues
between local and foreign currencies and is part of
DIAL’s foreign exchange risk management. Because
a proportion of DIAL’s revenues are in foreign cur-
rencies, the inclusion of external commercial bor-
rowings creates a natural hedge.
• The concession contract prevents DIAL giving
security to lenders over the core airport assets, but
it can be given over non-core assets. Lenders can
take security over the shares in DIAL.
Table 1
Source of funding Amount
Equity and internal accruals Rs 25.00 billion
Commercial debt (Rupee and ECB) Rs 49.86 billion
Lease payments from commercial development Rs 27.39 billion
TOTAL Rs 102.25 billion
Note: The total of RS 102.25 billion converts to circa US$1.9 billion (November 2010).
* An upfront fee of Rs 1.5 billion, together with payment for capital works in progress
KEY CONTRACTUAL FEATURES
• DIAL’s revenue is made up of two main elements:
1. Aeronautical charges: Existing charges remain
unchanged until the completion of capital
upgrades, when a 10 percent increase will be
permitted. Thereafter, these charges are capped
by CPI-X increase to achieve a target revenue
for a five-year regulated period. The CPI used
will be the All India CPI.
2. Non-aeronautical charges: These are the rev-
enues from non-aeronautical activities, such as
advertising, duty-free retail sales, car parking
facilities, and food and beverages.
• DIAL is responsible for developing the airport as
per the concession master plan. The first phase
requires the upgrade of two existing terminals and
the construction of a new runway (and associated
infrastructure), followed by the completion of a new
third terminal, cargo facilities, and airport access. The
entire construction period was approximately 36
months, with targeted completion in March 2010.
• DIAL leases the site from the AAI for a nominal
rent. The concession also allows DIAL to develop 5
percent of the total airport size for commercial
property development; this is expected to primarily
constitute hotel construction. The income secured
from this commercial development is contributed as
quasi-equity for the airport’s development.
Use Amount
Capital costs Rs 80.26 billion
Preliminary expenses Rs 6.72 billion
Upfront payments to AAI* Rs 1.96 billion
Financing costs Rs 6.68 billion
Contingency Rs 6.63 billion
Rs 102.25 billion

Delhi International Airport Ltd.
P U B L I C - P R I V AT E PA R T N E R S H I P F O R C R I T I C A L I N F R A S T R U C T U R E
• The contract has some performance measures: for
example, following completion of capital upgrades
in 2010, DIAL should achieve a rating of at least
3.5 for Airports Council International passenger
surveys; the airport master plan should be updated
at least every 10 years; and DIAL should participate
in the International Air Transport Authority within
12 months of contract signature. DIAL provides a
performance guarantee of Rs 5 billion for the first
five years of contract; this guarantee is required to
be escalated as per the CPI on an annual basis.
• All the shareholders are required to maintain their
stake in DIAL for a specified period. In addition,
financing agreements executed with lenders also
have minimum management control requirements.
• The Government of India provides a cap on DIAL’s
risk from change of law and has an overall cap on
its annual liabilities to DIAL.
• On termination for default by a party, compensa-
tion is to be paid by the party at fault as follows:
—AAI default: 100 percent outstanding debt
and 120 percent equity invested as part of
core assets
—DIAL default: 90 percent of debt outstanding
• DIAL has right of first refusal to develop a new
airport within 150 kilometers of the project during
the first 30-year concession period.
KEY DRIVERS FOR THE INVOLVEMENT OF PRIVATE
FINANCE
The Government of India had two main aims in want-
ing to modernize the airport and improve the efficiency
of its operations and financing while retaining some
influence. By choosing a public-private partnership, the
Indian government has retained influence on the opera-
tion of DIAL through the AAI’s 26 percent shareholding
but does not have control. DIAL has arranged external
financing to fund a major program to upgrade the
airport, and DIAL’s private-sector shareholders include
specialist airport operators.
Case Study 1: Delhi International Airport Ltd.
This airport is the second largest in India in terms of
passengers handled and has seen significant growth—in
the three years from the end of 2004 to 2007, passenger
numbers grew 25 percent per annum. The opportunity
to invest in the enterprise was attractive to private
investors, and 10 groups responded to the initial expres-
sion of interest, with 6 groups selected to submit
detailed bids.
LESSONS LEARNED
The Indian government took time to consider an
approach that best met their aims and built a contract
and procurement process that reflected this. Some
changes were made to the national legal framework
prior to launching the procurement to, for example: 89
• ensure that the state would continue to provide
certain activities such as air traffic control, security,
and customs;
• provide commercial incentives, such as making land
available; and
• prepare to establish an independent regulator for
airports and airlines.
There was significant interest in the opportunity,
and the competitive bidding process has secured the
Government of India a 45.99 percent interest in DIAL’s
revenues along with a 26 percent management stake.
The contractual approach, revenue forecasts—including
the regulated revenue structure—and sector knowledge
demonstrated by DIAL meant that the project was
strongly supported by commercial banks.
REFERENCES
Dealogic (accessed November 2, 2009).
DIAL (Delhi International Airport Private Limited). 2007. Information
Memorandum. December.
———. 2010. News and Update, March 23. Available at
http://www.ecargo-dial.com.
Case Study 2: The Cross City Tunnel

The Cross City Tunnel

THE CHALLENGE OF LONG-TERM FORECASTING

Forecasts for traffic and tolls should be rigorously OVERVIEW

challenged by all parties because they underpin The Cross City Tunnel is a 2.1-kilometer-long tunnel
located in Sydney, Australia. It links the western fringe
the project’s economics and overall viability
of the central business district (CBD) to the eastern
suburbs. The project was a public-private partnership
intended to design, build, finance, and operate the tunnel
Fast facts that would charge users a toll. The concession was
awarded to Cross City Motorway Ltd, composed of
Size $A 789 million Cheung Kong Infrastructure Holdings, DB Capital
Partners, and Bilfinger Berger. It reached financial close
Date December 18, 2002 on December 18, 2002, and opened for traffic in August
Location Sydney, Australia 2005. However, traffic through the tunnel never reached
the levels forecast and after December 2006, after little
Type Economic more than a year, the company was insolvent, with
debts of over $A 500 million. In June 2007, Leighton
Approach Concession
90 Contractors and ABN AMRO acquired Cross City
Phase New Tunnel group for $A 700 million.

Market Developed

KEY STAKEHOLDERS

Finance
• The New South Wales government led the
procurement of this project.

• The original concessionaire, Cross City Motorway

Equity
27% Ltd, was a special-purpose company owned by
Cheung Kong Infrastructure, the largest diversified
Debt infrastructure company in Hong Kong with a mar-
73% ket cap of approximately HK$30 billion (2001); DB
Capital Partners, one of the largest infrastructure
fund managers in Australia; and Bilfinger Berger,
one of Germany’s largest civil engineering compa-
nies with operations globally.
$A 789 million
 Case Study 2: The Cross City Tunnel
The Cross City Tunnel
THE CHALLENGE OF LONG-TERM FORECASTING

Structure

Original shareholder group Current shareholder group

Cheung Kong
Infrastructure
Holdings

50%

Leighton Contractors ABN AMRO

DB Capital
Partners Bilfinger Berger
91
6% 94%

30% 20%

Government of Cross City Senior debt

New South Wales Motorway Ltd lenders

■ Public ■
sector
Public■sector
Equity ■
investors
Equity and
investors
shareholders
and shareholders
■ Project■company
Project and
company
related ■
parties
Debt providers
■ Debt providers
Case Study 2: The Cross City Tunnel

The Cross City Tunnel

THE CHALLENGE OF LONG-TERM FORECASTING

trouble when the tunnel failed to attract the traffic

FINANCIAL OVERVIEW
required to meet interest payments. Even when use
was free, patronage was still below the very opti-
Source of funding Amount Percentage
mistic forecasts of 90,000 vehicles a day. The low
EQUITY 27.5%
traffic volume was exacerbated by the high cost of
Cheung Kong Infrastructure (50%) $A 110 million
the toll—$A 3.56; all these factors resulted in a
DB Capital Partners (30%) $A 66 million
negative reaction by users.
Bilfinger Berger (20%) $A 33 million

DEBT $A 580 million
TOTAL $A 789 million
The debt was provided by a domestic and international
banking group.
92 KEY CONTRACTUAL FEATURES
• During the bidding phase, the public sector selected
an alternative and more expensive tunnel route pro-
posed by the Cross City Motorway consortium. As
there was no additional public funding available,
these additional costs were planned to be recovered
through higher tolls.
• The government committed to close a number of
surface roads, thereby “encouraging” people to use
the tunnel.
KEY DRIVER FOR THE INVOLVEMENT OF PRIVATE
FINANCE
The primary objectives of the Cross City Tunnel project
are to reduce through traffic in central Sydney, thereby
easing traffic congestion and improving environmental
amenity in the CBD and on streets approaching the
CBD, and to improve east–west traffic flows.
72.5% • Assessment of project bids should include identifi-
cation of key assumptions upon which success
100.0%
depends. Such critical assumptions should be
subject to independent evaluation.
• There is a need to develop better and more flexible
pricing models for PPPs. For example, the economic
benefit of using a toll road during peak hours is
very different from the benefit of using it late at
night. Despite the difference in benefit, the driver
still pays the same price. By closing down travel
alternatives, government removed incentives for the
operators to use pricing to attract business.
• There is a need for greater transparency in PPP
contracts. Both the private sector and government
need to be more open about questions regarding
risk and pricing. In a similar vein, there is a need
to make the details of the project open to public
scrutiny before the project is completed. This did
not happen in the Cross City Tunnel project, and
the use of a public auditor would have been advan-
tageous.
• There is also a need for governments to pursue PPP
projects that are not only profitable, but that also
serve to protect (and improve) the public interest.
REFERENCES
Deutsche Bank Group. 2002. “CrossCity Motorway Read to Work.”
Press Release, December 19. Available at
http://newzealand.db.com/newzealand/content/4791_4714.htm.

LESSONS LEARNED Infrastructure Implementation Group, The Premier’s Department. 2005.

“Review of Future Provision of Motorways in NSW.” December.

NSW Business Chamber website:

• There is a need to develop more realistic and accu- http://www.nswbusinesschamber.com.au/?content=/channels/
rate traffic forecasts, and, in turn, more realistic Media_centre/_Media_releases_2005/10-2005_October/
cross_city_tunnel.xml.
financial forecasts. The project encountered serious
 Case Study 2: The Cross City Tunnel
The Cross City Tunnel
THE CHALLENGE OF LONG-TERM FORECASTING

Phibbs, P. 2008. “Driving Alone: Sydney’s Cross City Tunnel.” Built

Environment 34 (3): 364–74.

93
Case Study 3: Lekki Toll Road Concession

Lekki Toll Road Concession

ARRANGING LOCAL FINANCING

A pilot public-private partnership with a high level OVERVIEW

of local participation in the financing aspects The Lekki Toll Road Concession is a US$347 million,
30-year public-private partnership toll road concession
signed on April 24, 2006, between Lagos State and the
Lekki Concession Company (LCC). The project aims to
Fast facts solve the historical problems of heavy traffic and poor
road conditions from Lekki to Epe in southern Nigeria.
Size US$347 million The road will be tolled with different toll rates depend-
Date April 24, 2006 (financing October 2008) ing on vehicle size. The sponsors will handle traffic risk.
The project will be accomplished in two phases:
Location Lagos State, Nigeria
• Phase I: Expansion and upgrade of 49.4 kilometers
Type Economic
of the Ozumba Mbadiwe Avenue/Lekki-Epe
Approach Public-private partnership Expressway

Phase Combination of new-and-existing

94 • Phase II: Construction of 14 kilometers of Coastal
and established
Road; there is also an option to improve the
Market Underdeveloped Southern Bypass

Finance KEY STAKEHOLDERS

• Lagos State: Project promoter and mezzanine lender

Equity • Lekki Concession Company (concessionaire):

23.35%
Party responsible for operations. Macquarie Bank of
Debt
Australia and Old Mutual of South Africa (through
53.30% Revenue during
construction the African Infrastructure Investment Fund, or AIIF)
23.35% are major shareholders. Other shareholders include:

—Asset and Resource Management Company

(ARM): Key investor; investment manage-
ment firm
US$347 million

—Larue Projects International Ltd: Key investor

• First Bank, UBA, Diamond Bank, Zenith Bank

& Fidelity: National senior lender syndicate

• African Development Bank (AfDB) and

Standard Bank: Regional senior lenders

• Hitech: Contractor; construction company and

equity provider
 Case Study 3: Lekki Toll Road Concession
Lekki Toll Road Concession ARRANGING LOCAL FINANCING

Structure

Asset and Resources

Management Company African Infrastructure Hitech
& Larue Projects Investment Fund (EPCM contractor)
International

95

Senior debt
lenders

Lekki Concession
Lagos State Company
Concession
agreement
Mezzanine loan
(Lagos State)

■ Public sector ■ Equity investors and shareholders ■ Project company ■ Debt providers
Case Study 3: Lekki Toll Road Concession

Lekki Toll Road Concession

ARRANGING LOCAL FINANCING

ways, and bus stops along the expressway; the con-

FINANCIAL OVERVIEW
struction of 6 kilometers of the new 20-kilometer-
long coastal road, which will serve as an alternative
Source of funding Amount Percentage
road up to Toll Plaza 1; and the construction of 10
TOTAL EQUITY US$81 million 23.35%
interconnecting link roads between the expressway
Local equity (ARM, Larue, Hitech) US$27 million 7.78%
and the coastal road.
International equity (AIIF) US$20 million 5.77%
Mezzanine (Lagos State) US$34 million 9.80%
• The concessionaire will also construct three toll
REVENUE DURING CONSTRUCTION US$81 million 23.35% plazas along the expressway and will be responsible
for the operation and maintenance of the toll road
TOTAL DEBT US$185 million 53.30%
during the concession period.
Local bank debt US$59 million 17.00%
International bank debt (Standard Bank) US$75 million 22.60%
• Phase II will see construction of the remaining 14
Development finance (AfDB) US$51 million 14.70%
kilometers of the coastal road, and is dependent on
TOTAL FUNDING US$347 million 100% the Lagos State government’s completion of civil
works on the new coastal defenses that require
96 additional financial resources.

The funding structure for the project is: debt 53

• The project is expected to create 635 short-term
percent, equity 23 percent, and revenue during con-
and 1,146 long-term jobs, with a good proportion
struction 23 percent. There is a sovereign guarantee in
of the employees being women.
place covering a termination scenario.
The AfDB was identified as a potential source of
long-term financing and, together with Standard Bank,
was able to offer a financial package that matched the KEY DRIVERS FOR THE INVOLVEMENT OF PRIVATE
long-term nature of the project revenues. FINANCE
Furthermore, the AfDB and Standard Bank were
able to structure a swap facility whereby the LCC’s
• Convenience: Traffic decongestion, easier access to
exposure to dollar-denominated obligations to the
and from the Lekki-Epe corridor, breakdown and
AfDB was significantly mitigated. AfDB participation
recovery assistance, ambulance service, customer call
was critical to this deal, without which neither Standard
center, and so on
Bank nor the local banks would have participated.

• Journey times: Shorter and more predictable jour-

ney times, reduced wear and tear on motor vehi-
KEY CONTRACTUAL FEATURES cles, and reduced fuel consumption by road users

• Safety and security: Law enforcement and

• This PPP contract will be based on the design,
improved road safety
build, operate, and transfer (DBOT), and the
rehabilitate, operate, and transfer (ROT) business
• Other benefits: Increase in employment opportu-
models.
nities, lower vehicle operating costs, support for
continued and new business growth, and the
• The concessionaire will upgrade and rehabilitate
enhancement of real estate values in the region
the existing 49.5 kilometer long expressway.

• Phase I will involve the construction of a new ramp

to carry traffic onto the Falomo Bridge; the con-
struction of new interchanges, footbridges, walk-
 Case Study 3: Lekki Toll Road Concession
Lekki Toll Road Concession ARRANGING LOCAL FINANCING

LESSONS LEARNED

• This was a predominantly Nigerian transaction. The

LCC team, the contractors, and the local lenders as
well as most of the shareholders were all Nigerian.
Such a high level of local participation seemed vital
in addressing the public relations, technical, politi-
cal, financial, commercial, and legal issues that arose
throughout the process. Additionally, financial close
was successfully achieved in October 2008 on
ground-breaking terms for Nigeria.

• The project emphasizes the role of the state in

ensuring the success of PPP projects. Lagos State
government consistently demonstrated a strong
commitment to the concession, including investing 97
N5 billion in mezzanine finance and political sup-
port.

• The Lekki Toll Road Concession emphasizes the

role of PPPs as the preferred model for road infra-
structure financing and delivery in Nigeria.

• This project will also serve as a starting point for a

new private-sector highway services industry within
the West African region.

REFERENCES
AfDB (African Development Bank). Lekki Toll Road Project. Available
at http://www.afdb.org/en/projects-operations/project-portfolio/
project/lekki-toll-road-project-752/ (accessed May 2010).

High, R. 2008. International Construction. June 30. Available at

http://www.khl.com/magazines/international-construction/
detail/item25939/AfDB-to-fund-Nigeria%27s-Lekki-toll-road/.

Lekki Concession Company Ltd. website: http://www.lcc.com.ng.

Ngumi, J. 2009. Bankers Association for Finance and Trade. Driving

Trade & Growth: Investment in Infrastructure. Presentation, June
30. John Ngumi, Standard Bank.

Oforiokuma, O. 2008. Infrastructure Experience in Lagos State: Lekki

Toll Road Concession. Presentation at the Commonwealth
Business Council Infrastructure Workshop, London, December 4.
Available at http://www.cbcglobal.org/CBCG_Library/
Opuiyo%20Oforiokuma.pps.

Trinity International LLP. A Review of the Lekki-Epe Expressway Toll

Way Project. Trinity LLP. Available at http://www.trinityllp.com/
focus_feb09_2.php.
Case Study 4: Ontario Highway 407 Toll Road

Ontario Highway 407 Toll Road

BEST PRACTICES IN DISPUTE RESOLUTION

All parties must understand the contract OVERVIEW

principles, otherwise disputes will arise; if they do, In 1999, an international consortium comprised of
Concesiones de Infraestructuras de Transporte
judicial independence is of critical importance
(CINTRA), SNC-Lavalin (SNC) and Grupo Ferrovial
(Ferrovial) was awarded a C$3.1 billion bid for the
concession of Highway 407 in Ontario. The consortium
Fast facts was to own and operate the 69 kilometers of the toll
Highway 407 that was already in service and to design,
Size Approximately C$4.0 billion build, own, and operate the 15-kilometer eastward and
the 24-kilometer westward extensions. C$900 million
Date 1999 was added to the bid to cover construction costs, debt
Location Toronto, Ontario, Canada service, and working capital, making a total transaction
of approximately C$4.0 billion under the 99-year
Type Economic concession. SNC-Lavalin and Ferrovial-Agroman
Internacional SA were the engineering, procurement,
Approach Concession
98 and construction (EPC) contractors.
Phase Existing and established The Ontario Highway 407 also used only electronic
toll roads, which was ground-breaking at the time and
Market Developed minimized user distraction.

Finance KEY STAKEHOLDERS

Subordinated debt
6% The initial and current shareholdings for the concession
are shown below.

• The Province of Ontario government was

responsible for the procurement.

Equity • The shareholders of concessionaire—407 Express

20%
Toll Route (ETR) Ontario—have gone through a
number of sales and disposals. The table below
Senior debt shows the initial and current shareholding structure.
70%
Concessionaire* Initial share (%) Current share (%)

CINTRA 58.46 53.23

SNC 26.92 16.77
Grupo Ferrovial 14.62 —
Macquarie Infrastructure Group — 30.00

* In October, 2009, CINTRA and Grupo Ferrovial merged to create Ferrovial.

Junior debt bridge All of the shareholders are experienced infrastructure

4% investors.

C$4.0 billion
 Case Study 4: Ontario Highway 407 Toll Road
Ontario Highway 407 Toll Road BEST PRACTICES IN DISPUTE RESOLUTION

Structure

Grupo Ferrovial Cintra Concessiones Macquarie

de Infraestructuras Investment Group SNC
(had 14.62% of shares de Transporte
at financial close)
53.23% 30% 16.77%

99

Province of Concession agreement 407 ETR Senior debt

Ontario Government (Ontario) lenders

■ Public sector ■ Equity investors and shareholders ■ Project company ■ Debt providers
 Case Study 4: Ontario Highway 407 Toll Road

Ontario Highway 407 Toll Road

BEST PRACTICES IN DISPUTE RESOLUTION

Figure 1: Threshold
FINANCIAL OVERVIEW
The approximate amounts of financing put in place at
financial close are detailed below. The consortium
financed their construction period through short-term
senior debt, which was then refinanced by a series of
capital markets bond issues two to three years later.

Type of financing Amount Percentage

Equity C$708 million 20%

Subordinated debt C$217 million 6%
Junior debt bridge C$150 million 4%
Traffic level

Senior debt C$2,500 million 70% Traffic threshold

TOTAL C$3,575 million 100%

Penalty
100 KEY CONTRACTUAL FEATURES (congestion
Toll threshold payments)

• Four principal documents defined the legal and

regulatory framework within which sponsors were
to operate:
Toll rates
—The 407 Act

—The Share Purchase Agreement

—The Restriction on Transfer Agreement

—The Concession and Ground Lease
Agreement
• Under the concession agreements, the concession-
aire is free to raise the toll rate while achieving traf-
fic levels above the traffic threshold. If traffic levels
fall below the traffic threshold and the toll rate is
above the toll threshold, a penalty applies. This
arrangement is shown in Figure 1.
—The traffic thresholds are based on a “base
year” for traffic. The nullification of the base
year has been disputed by the Ontario gov-
ernment.
an incentive to improving the highway man-
agement and infrastructure to mitigate con-
gestion. The structure does, however, set a
minimum level of tolls regardless of traffic.
KEY DRIVERS FOR THE INVOLVEMENT OF PRIVATE
FINANCE
• Private financing is allowed for the construction of
extensions at no additional cost to taxpayer.
• Extensions were intended to reduce congestion on
existing highways.

—These arrangements are aimed at dealing • Enhanced transportation infrastructure desired to

with congestion with the assumption that stimulate economic activity in communities across
the penalty congestion payments will provide

Ontario Highway 407 Toll Road BEST PRACTICES IN DISPUTE RESOLUTION
the Greater Toronto Area and throughout the
province.
LESSONS LEARNED
• Judicial independence: One of the interesting fea-
tures of the project has been the dispute that arose
between the ETR and the government on the right
to increase tolls. But the legal process, as outlined
below, has been notably independent:
—The 407 ETR designated 2002 as the base
year during that same year.
—In January 2004, Ontario alleged that the
407 ETR did not have right to increase tolls
without first obtaining the government’s
approval.
—On February 2, 2004, Ontario alleged that
the 407 ETR had not achieved conditions
required to establish 2002 as the base year.
Also during February, tolls on Highway 407
increased by a full cent to 13.95 cents per
kilometer.
—On July 10, 2004, an arbitrator found in
favor of the 407 ETR on all issues. Ontario
appealed against the decision.
—On January 7, 2005, the Ontario Superior
Court of Justice ruled in favor of the 407
ETR and dismissed the appeal by the
provincial government.
—On August 16, 2005, the arbitrator of the
Ontario Court of Appeal ruled that base year
was achieved in 2002 and that the Province,
by its conduct, had accepted 2002 as the base
year. The Province announced intentions to
appeal decision.
• Complexity of contract: Conditions included in
contract for establishment of base year were open to
varied interpretations.
Case Study 4: Ontario Highway 407 Toll Road
• Long-term arrangements: The contract lacked terms
to provide the government with adequate control
of toll rate increases, allowing the 407 ETR full
discretion in this area.
REFERENCES
407 ETR website: http://www.407etr.com/.
Adam, B. 2004. “Ontario to Appeal 407 Ruling: Change in Tolls
Complied with Concession Contract, Arbitrator Says.”
Financial Post Magazine July 13: FP6.
Canada NewsWire. 1999. “Province Sells Highway 407 for $3.1
Billion.” Canada NewsWire, Domestic News section, April 13.
Toronto: Canada NewsWire Ltd.
———. 2005a. “407 ETR Announces New Toll Increase in Wake
of Favourable Court Ruling.” Canada NewsWire, January 6.
Toronto: Canada NewsWire Ltd.
101
———. 2005b. “Province Appeals Arbitration Decision on Base Year
Dispute with 407 ETR.” Canada NewsWire, Financial News
section, September 15. Toronto: Canada NewsWire Ltd.
———. 2009. “On the 407, 10 Years Go By Fast.” Canada NewsWire,
May 6. Toronto: Canada NewsWire Ltd.
Dealogic database (accessed November 3, 2009).
Macquarie Infrastructure Group Prospectus 2002, available at
http://www.macquarie.com.au/au/mig/acrobat/407_prospectus.pdf.
Macquarie Infrastructure Group. 2005. “Ontario Superior Court
Rules in Favour of 407 ETR and Dismisses Province Appeal
Re Change Request.” ASX Release, January 7. Available at
http://www.asx.net.au/asxpdf/20050107/pdf/3pb5j55xw9jgn.pdf.
———. 2007. “407 ETR Announces Revised Toll Rates.” ASX Release,
December 31. Available at http://www.asx.net.au/asxpdf/
20071231/pdf/316r3b27k4c3tx.pdf.
———. 2009. “407 ETR Announces Revised Toll Rates.” ASX Release,
January 2. Available at http://www.asx.net.au/asxpdf/20090102/
pdf/31ffh05dkjsnq3.pdf.
Tomesco, F. 2004. “Lavalin Won’t Sell Hwy 407 Stake.” Financial Post
October 20: 5.
 Case Study 5: Port of Baltimore, Seagirt Marine Terminal

Port of Baltimore,
Seagirt Marine Terminal
LONG-TERM REVENUE SHARING ARRANGEMENT

Arrangements can be put in place to ensure the OVERVIEW

public authority shares in the future success of a The Port of Baltimore project is a 50-year lease and
concession signed in November 2009 between the
project
Maryland Port Administration (MPA) and Ports America
Chesapeake (PAC) that entails the operation of the
Seagirt Marine Terminal at the Port of Baltimore. As
Fast facts part of this arrangement, PAC will construct a 50-foot-
deep berth and associated infrastructure, ready for use by
Size US$334 million the larger vessels that will be able to come through a
widened Panama Canal from 2014. As well as an annual
Date November 2009 rent payment, the concession includes a fee-sharing
Location Seagirt Marine Terminal, Baltimore, arrangement whereby the MPA will receive a US$15
Maryland, United States fee (indexed) for each container handled over a thresh-
old of 500,000 per annum.
Type Economic

102 Approach Concession

KEY STAKEHOLDERS
Phase Expansion of existing

Market Developing
• The MPA, as owners of the Seagirt Marine
Terminal and the public authority responsible for
procuring the project
Finance
• The Maryland Transportation Authority (MdTA), as
Free cash flow from port operation
the previous owners of the terminal and the public
3% (estimate) authority responsible for carrying out certain
upgrades to the roads and bridges in Maryland

MEDCO Concessionaire • PAC, an affiliate of Ports America Group, which is

Series B equity
revenue bonds owned by Highstar Capital—a specialist infrastruc-
22%
25% ture fund

MEDCO Series A • The Maryland Economic Development

revenue bonds
50% Corporation (MEDCO), a body created by the
State of Maryland to own or develop property for
economic development. For this project MEDCO
was the conduit to issue approximately US$249
US$334 million
million in revenue bonds on behalf of PAC.
MEDCO also facilitated the purchase of the termi-
nal by the MPA from the MdTA.
 Case Study 5: Port of Baltimore, Seagirt Marine Terminal
Port of Baltimore,
Seagirt Marine Terminal
LONG-TERM REVENUE SHARING ARRANGEMENT

Structure

Highstar Capital

100%

103
Ports America Group

100%

Maryland
Transportation Rec
eipt
Authority of fu
nds
at st
art o
f con
cess
i on

Maryland Ports America

Port Administration Concession agreement Chesapeake
C
fo r PA
nds
t bo
e x emp EPC contract for new berth Crane supplier
Tax-
Maryland Economic
Development
Corporation
McClean Shanghai Zhenhua Heavy
Contracting Company Industry Co. Ltd.

■ Public sector ■ Equity investors and shareholders ■ Project company and related parties
 Case Study 5: Port of Baltimore, Seagirt Marine Terminal

Port of Baltimore,
Seagirt Marine Terminal
LONG-TERM REVENUE SHARING ARRANGEMENT

FINANCIAL OVERVIEW KEY CONTRACTUAL FEATURES

The financing of this project was unique as it is one of
the first US port concession projects to be financed
through the bond market. It was structured so that the
private concessionaire could fund its obligations with
tax-exempt finance.
A high-level summary of the upfront sources and
uses of funds is outlined below.
Source of funding Amount Percentage
• PAC will lease the 200-acre Seagirt Marine
Terminal for a 50-year period, and will make an
annual payment to the MPA.
• PAC will construct a 50-foot berth in the Port of
Baltimore and will also invest in cranes and other
infrastructure at the port.
Uses

Concessionaire equity US$75 million 22% US$140 million

to the MdTA
• PAC will have full control over the operations
MEDCO Series A
revenue bonds US$167 million 50%
as the purchase of the terminal under the terms of the lease and
price of the
MEDCO Series B
concession, but the MPA will continue to own it.
terminal
revenue bonds US$82 million 25%
Free cash flow US$194 million • The state will receive a US$15 fee for every con-
from port operation to fund the
104 (estimate) US$10 million 3% terminal tainer after the first 500,000 moved through the
upgrade port annually. This fee will be adjusted for inflation,
TOTAL US$334 million 100%
and is projected to provide over US$450 million in
future value to the MPA and the State of Maryland.
• The US$140 million payment to the MdTA will
be for investment in roads, tunnels, and bridge facil- • Ports America will give the port an annual rent
ities in Maryland. This was partly funded with con- payment of US$3.2 million, adjusted for inflation.
cessionaire equity and partly by Series A Economic
Development Revenue Bonds issued by MEDCO.
KEY DRIVERS FOR THE INVOLVEMENT OF PRIVATE
• The cost of berth expansion (approximately FINANCE
US$105 million) will be principally funded from
the proceeds of Series B Economic Development
Revenue Bonds issued by MEDCO, the balance of • The need to increase the competitiveness of the
the concessionaire equity, and some free cash flow Port of Baltimore: The construction of 50-foot
generated by the operations of the terminal. berths would enable the larger ships traversing the
Panama Canal to dock, bring additional business
• PAC is the obligor on the revenue bonds, which are to the port and help to secure jobs at the port.
secured against PAC’s interest in the concession and Without this private funding, the port would see
its assets. business opportunities shift to other US East Coast
ports, such as the Norfolk Port, which already has
• Moreover, PAC expects to invest a further US$500 50-foot berths.
million over the life of the concession to maintain
and upgrade the terminal as necessary. This invest- • The MdTA will reinvest funds as part of a capital
ment is forecast to come from free cash flow from program. This will include upgrades to I-95, the US
the operation of the terminal. 40 Hatem Bridge, and the US 50/301 Bay Bridge.
 Case Study 5: Port of Baltimore, Seagirt Marine Terminal
Port of Baltimore,
Seagirt Marine Terminal
LONG-TERM REVENUE SHARING ARRANGEMENT

LESSONS LEARNED

• The concession has been structured so that the

public authorities benefit not only from an upfront
receipt but will also share in the future success of
the port.

• The financing arrangements were structured to ensure

that the financing risk sat with the concessionaire
yet the project could still benefit from tax-exempt
debt rather than using commercial bank debt.

REFERENCES
Highstar Capital. 2010. “Deal Analysis: Seagirt Marine Terminal.” 105
January 11. Available at http://www.highstarcapital.com/
newsFull.php?id=63.

Maryland Economic Development Corporation website:

http://www.medco-corp.com.

Maryland Economic Development Corporation. 2010. Analysis of the FY

2010 Maryland Executive Budget, 2009: Financial Statement Data,
document T00A99. Available at http://mlis.state.md.us/
2010rs/budget_docs/all/Operating/T00A99_-_MEDCO.pdf
(accessed March 15, 2010).

Office of Governor Martin O’Malley. 2009. “Governor O’Malley

Announces 50-Year Contract with Ports America to Operate Port
of Baltimore’s Seagirt Marine Terminal.” Press Release,
November 20. Available at http://www.governor.maryland.gov/
pressreleases/091120.asp.

Project Finance. 2010. “Maryland Seagirt: Homeland Advantage.”

Project Finance Magazine, February 2010 Deal Analysis. Available
at http://www.projectfinancemagazine.com.
 Case Study 6: Chicago Skyway

Chicago Skyway
LONG-TERM CONCESSION OF A REAL TOLL ROAD

The effective privatization of a real toll road OVERVIEW

can generate significant upfront payments for The Chicago Skyway Bridge is a 7.8-mile real toll road
built in 1958 (and extensively reconstructed in
the public authority
2001–04) to connect the Dan Ryan Expressway to the
Indiana Toll Road. Up until the time of the transaction
the road was operated and maintained by the City of
Fast facts Chicago. Then, in January 2005, the City of Chicago
entered into a 99-year operate-and-maintain concession
Size US$1.83 billion with the Skyway Concession Company (SCC). The
contract was awarded in October 2004 and the lease
Date January 2005 commenced in January 2005. The structure of the con-
Location Chicago, Illinois, United States cession effectively meant that the road was privatized,
and the SCC assumed responsibility for all operations
Type Economic and maintenance of the Skyway, including the right to
all toll and other concession revenue. Upon entering the
Approach Concession
106 concession, the SCC paid the City of Chicago US$1.83
Phase Existing and established billion (the US$1.82 billion bid adjusted for inflation).
By August 2005 the transaction was refinanced, creating
Market Developing a total finance package of US$2.15 billion.

KEY STAKEHOLDERS
Finance
• The City of Chicago had lead responsibility to pro-
Subordinated debt
7% cure the project and managed the competitive
process to let the concession.

• The SCC is a private company owned by the

Equity Spanish Cintra Concessiones de Infraestructuras de
28%
Transporte (55 percent) and by the Australian
Senior debt
Macquarie Investment Holdings (45 percent), both
65% of which have been active investors in infrastructure
projects.

US$1.83 billion
 Case Study 6: Chicago Skyway
Chicago Skyway
LONG-TERM CONCESSION OF A REAL TOLL ROAD

Structure

Cintra Concessiones Macquarie

de Infraestructuras Investment Holdings
de Transporte

55% 45%

107

Subordinated debt
lenders

Skyway Concession
City of Chicago
Concession agreement Company LLC
and lease
Senior debt
lenders

■ Public sector ■ Equity investors and shareholders ■ Project company ■ Debt providers
 Case Study 6: Chicago Skyway
Chicago Skyway
LONG-TERM CONCESSION OF A REAL TOLL ROAD
FINANCIAL OVERVIEW
The financing put in place at the time of the concession
award in January 2005 was soon refinanced in August
2005; these two financing structures are summarized
below.
Source of funding January 2005
Concessionaire equity US$1.00 billion (45.5%) US$0.60 billion (28%)
Concessionaire raised
subordinated debt — US$0.15 billion (7%)
Concessionaire raised
senior debt US$1.19 billion (54.5%) US$1.40 billion (65%)
TOTAL US$2.19 billion US$2.15 billion (100%)
Note: Amounts are approximate.
The original senior loan was a nine-year loan
108
underwritten by a group of European banks. When the
SCC refinanced, US$1.4 billion of AAA-rated bonds
were issued and US$150 million of subordinated debt
was arranged. This refinancing enabled the SCC’s share-
holders to recover approximately US$400 million of
their original investment.
KEY CONTRACTUAL FEATURES
• The SCC is responsible for all operating and main-
tenance costs of the Skyway, and has the right to all
toll and concession revenue. The concession agree-
ment sets out the required operating standards.
• The concession agreement limits the amount and
level of toll increases the SCC can make, although
cumulatively, if the maximum increases are imple-
mented, the rise in toll charges could be significant.
From 2008 through 2017, any increase is limited to
a maximum amount of 7.9 percent per year; in the
remaining 86 years, the SCC can adjust tolls by the
greater of (1) 2 percent per year, (2) inflation, or (3)
the increase in GDP per capita.
• The concession agreement places no restrictions on
the public authorities constructing competing toll-
free highways (such non-compete clauses are often
a feature of real toll concessions).
• There is no revenue-sharing provision between the
SCC and the City of Chicago.
• There are provisions to ensure that the road is
maintained during the final 10 years of the conces-
sion prior to its being handed back to the City.
August 2005
KEY DRIVERS FOR THE INVOLVEMENT OF PRIVATE
FINANCE
There appear to have been three main drivers for this
project:
• Financial: The main driver appears to have been
the desire for asset maximization by the City of
Chicago and the opportunity to monetize an exist-
ing infrastructure asset to help address budget
deficits, although the project does remove future
revenue for the City from the road. The proceeds
from the project were used as follows:
Use of proceeds Amount
Refund outstanding Skyway bond
principal and interest US$453 million
Retire a proportion of outstanding
General Obligation debt US$392 million
Permanent operating budget rainy day fund US$500 million
Eight-year capital budget and
operating budget stabilization fund US$475 million
TOTAL US$1,820 million
Source: Crain’s Chicago Business, November 2004.
Upon completion of these disbursements, Moody’s
upgraded the City’s overall bond rating a notch to
Aa3.
—When the City started the competitive
process in 2004, they knew that the road was
in good condition, there was an established
track record of traffic volume, and a long
concession period was on offer. All these
factors were likely to attract significant inter-
est from private investors.
—The three bids received in October 2004
ranged from an upfront payment of US$505

LONG-TERM CONCESSION OF A REAL TOLL ROAD
million to the US$1.82 billion bid by the
SCC.
• Operational: The project entailed the divestiture of
an asset that the City regarded as non-core and was
underpinned by the belief that an experienced pri-
vate-sector operator would run the toll road more
efficiently than the City could. One of the first
things the SCC did was to install automatic tolling
systems.
• Political: The number of union workers working on
the toll road was small (about 100), therefore there
was little union protest as these workers were mostly
retained or relocated to other city departments.
Also, the potential toll-rate increase backlash would
be geared more toward the private-sector operators
than toward the incumbent political leaders. As a
result, the potential political opposition has been
minimal.
LESSONS LEARNED
• The project demonstrates that public authorities can
receive significant revenues from the monetization
of its assets, but to maximize revenue and mitigate
public opposition, the choice of asset to be mone-
tized is important. The Chicago Skyway was an
existing, well-maintained asset with established traf-
fic patterns, yet it was a non-core asset for the City,
users had alternative routes available to them, and
only a small workforce was affected by the changes.
• The receipts from some monetizations of assets are
difficult to predict. There was a difference of more
than US$1.3 billion among the three bids for this
project.
Case Study 6: Chicago Skyway
Chicago Skyway
• It is probably too early to conclude whether or not
this project will be a long-term commercial success
because, as with any real toll road, the ability to
continue to increase tolls and maintain traffic is
unpredictable.
REFERENCES
Chicago Skyway website; http://www.chicagoskyway.org/about/.
Crain’s Chicago Business: http://www.chicagobusiness.com/ (accessed
November 2004).
Johnson, C., M. Luby, and S. Kurbanov. 2007. “Toll Road Privatization
Transactions: The Chicago Skyway and Indiana Toll Roads.”
School of Public and Environmental Affairs, Indiana University,
Paper, September. Available at http://www.cviog.uga.edu/
services/research/abfm/johnson.pdf.
Lopez de Fuentes, J. M. 2006. “Experiences with PPP in North
109
America.” Presentation. January 4, Orlando, Florida. Cintra.
Available at http://www.teamfl.org/pdf/407%20ETR-
Chicago%20Skyway-Trans-Texas-Lopez-De-Fuentes.pdf.
US DOT (Department of Transportation). Case Studies: Chicago
Skyway. Federal Highway Administration. Available at
http://www.fhwa.dot.gov/ipd/case_studies/il_chicago_skyway.htm.
———. Public-Private Partnerships. Federal Highway Administration.
Available at http://www.fhwa.dot.gov/ipd/p3/index.htm.
 Case Study 7: Doraleh Container Terminal

Doraleh Container Terminal

M U LT I L AT E R A L S U P P O R T B U I L D I N G

Multilateral support may be critical to attracting OVERVIEW

private finance for some national/regional infra- The Doraleh Container Terminal project encompasses
US$499 million in financing that includes a US$263
structure because it mitigates some of the finan-
million Islamic-compliant financing piece as well as a
cial and economic risks US$103 million multilateral loan. The Doraleh
Container Terminal S.A. (DCT) is a joint venture vehi-
cle between the Djibouti Port Authority and DP World
Djibouti. The concession commenced in October 2006.
Fast facts The DCT has a mandate for land reclamation as
well as for the development, financing, design, construc-
Size US$499 million
tion, management, operation, and maintenance of the
Date 2006 port. The DCT is located 11 kilometers from the exist-
ing Djibouti port facilities and is four times larger.
Location Doraleh, Djibouti Construction began in November 2006. Financial
Type Economic close for this project was reached in December 2007 for
110 the Islamic tranche, and in December 2009 for the con-
Approach Concession ventional tranche—through the African Development
Bank (AfDB) and PROPARCO.
Phase New
DP World Djibouti has management control of the
Market Underdeveloped project company. Project operations commenced in
February 2009 and were organized in two phases: the
first phase would have six super cranes and create a
capacity of 1.5 million twenty-foot equivalent container
Finance units (TEUs); the second phase would seek to double
this capacity.

Multilateral
Equity
debt
26.7% KEY STAKEHOLDERS
20.6%

• Port Autonome International de Djibouti (the

Senior debt Djibouti Port Authority)—a public-sector party
52.7%
that is 100 percent government owned; this author-
ity owns 67 percent of the Doraleh Container
Terminal.

US$499 million
• DP World Djibouti—a subsidiary of the DP World
of the United Arab Emirates, which is one of the
largest marine terminal operators in the world with
49 terminals across 31 countries; DP World
Djibouti owns 33 percent of the DCT, and will
operate the terminal.

• The AfDB
 Case Study 7: Doraleh Container Terminal
Doraleh Container Terminal M U LT I L AT E R A L S U P P O R T B U I L D I N G

Structure

Port Autonome DP
t
res

International de World
ip inte

Djibouti Djibouti
rsh
100% owne

67% 33%

111

Senior debt
lenders

Doraleh Container
Government of Terminal S. A.
Djibouti Concession
agreement
Multilateral debt
provided by AfDB
and PROPARCO

■ Public sector ■ Equity investors and shareholders ■ Project company ■ Debt providers
 Case Study 7: Doraleh Container Terminal

Doraleh Container Terminal

M U LT I L AT E R A L S U P P O R T B U I L D I N G

• The World Bank Group’s Multilateral Investment

KEY CONTRACTUAL FEATURES
Guarantee Agency (MIGA)

• PROPARCO—a development finance institution • The DCT is responsible for land reclamation, as
that is partly owned by the Agence Française de well as the development, financing, design, con-
Développement (AFD) and partly by private struction, management, operation, and maintenance
shareholders of the port.

A summary of the main project parties and con- • DP World Djibouti has management control of the
tracts is shown in Figure 1. project company.

• The government of Djibouti is entitled to an annu-

al management fee and is prohibited from develop-
FINANCIAL OVERVIEW
ing a competing container terminal.
The 10-year, US$263 million, Islamic-compliant senior
debt facility was arranged by Standard Chartered Bank, • The DCT has the option to employ existing
112 Dubai Islamic Bank, and WestLB AG. This debt is employees at the Djibouti port.
backed by a US$427 million, 99 percent political risk
insurance policy from MIGA. The MIGA guarantee is • The DCT is exempt from taxation.
greater than the tranche that it covers because it
includes a termination and compensation package from
the Djibouti government. The AfDB provided senior
loans amounting to US$80 million. KEY DRIVERS FOR THE INVOLVEMENT OF PRIVATE
FINANCE
Financing type Source of funding Amount Percentage

SENIOR DEBT 52.7%

• To improve container facilities in Djibouti in order
Dubai Islamic Bank US$263 million
to increase port traffic and open up new opportuni-
Standard Chartered Bank
ties for investment and growth, including breaking
WestLB AG
the country’s reliance on trade with Ethiopia for its
MULTILATERAL DEBT 20.6%
economic growth
African Development Bank US$80million
PROPARCO US$23 million
• To establish Djibouti as a gateway for Common
SHAREHOLDERS’ EQUITY 26.7%
Market for Eastern and Southern Africa (COME-
DP World Djibouti US$44 million
SA) members, and subsequently to promote region-
Port Autonome de Djibouti US$89 million
al integration through trade development
TOTAL US$499 million 100.0%

• To capitalize on Djibouti’s highly strategic location

The MIGA guarantee was obtained in order to
along the east-west African shipping lanes
cover four key risks: transfer restriction, expropriation,
war and civil disturbance, and breach of contract.
• To benefit from the transfer of management expert-
MIGA’s participation in the transaction helped mitigate
ise and technology and to increase employment and
perceived political risks for the banks and enabled the
invigorate the local economy; during the construc-
project sponsors to raise medium-term, cross-border
tion phase, it is expected that approximately
project financing.
350–500 local workers will be employed; on com-
pletion, the port will employ about 670 full-time
workers.
 Case Study 7: Doraleh Container Terminal
Doraleh Container Terminal M U LT I L AT E R A L S U P P O R T B U I L D I N G

LESSONS LEARNED

• Multilateral support from institutions such as MIGA

and the AfDB is critical to attracting private finance
in regional infrastructure because they mitigate
some of the financial and economic risks that
underlie such transactions.

• It is essential to have adequate financing at the

onset of projects in order to prevent financing gaps
that would otherwise appear once the project has
started.

• It is challenging to involve conventional financing

facilities with Sharia-compliant Islamic facilities
because of the difference in financing terms. 113

REFERENCES
DP World website: http://portal.pohub.com/portal/page?_pageid=
761,248775&_dad=pogprtl&_schema=POGPRTL.

Multilateral Investment Guarantee Agency website:

http://www.miga.org/projects/index_sv.cfm?pid=733.

Project Finance International website: http://www.pfie.com/pfideal.asp?

dealnumber=2324255158.

UNCTAD (United Nations Conference on Trade and Development).

2007. Review of Maritime Transport 2007. New York and Geneva:
United Nations. Available at http://www.unctad.org/en/docs/
rmt2007ch5_en.pdf.

World Bank and PPIAF (Private Participation in Infrastructure Projects

Database). 2009. “Individual Project Information: Doraleh
Container Terminal.” PPI Project Database. Washington, DC:
World Bank. Available at http://ppi.worldbank.org/explore/
PPIReport.aspx?ProjectID=4226.

Zebra Enterprise Solutions. 2009. “Djibouti Container Terminal:

Customer Case Study.” Available at http://zes.zebra.com/pdf/
customer-case-study/cs_dpw_djibouti.pdf.
 Case Study 8: Port of Miami Tunnel

Port of Miami Tunnel

P U B L I C - P R I VAT E PA R T N E R S H I P F O R A T E C H N I C A L LY C H A L L E N G I N G P R O J E C T

The choice of procurement approach for a techni- OVERVIEW

cally challenging project is as important as that This project entailed an approximately 35-year public-
private partnership (P3) contract between the Florida
for a financially challenging one
Department of Transportation (FDOT) and the Miami
Access Tunnel consortium (MAT) to design, build,
finance, maintain, and operate approximately three miles
Fast facts of tunnel and upgrade a linked causeway and feeder
roads. Financial close for the project was reached on
Size US$760 million October 15, 2009. The project is intended to improve
port access by diverting port traffic from city streets,
Date October 15, 2009 thereby relieving congestion in downtown streets.
Location Miami, Florida, United States Construction is expected to commence by mid-2010
and operations are expected to commence in 2014.
Type Economic The tunneling is technically challenging, and one
of the aims of FDOT’s procurement strategy was to
Approach Public-private partnership
114 attract overseas contractors with the necessary technical
Phase New experience.

Market Developing

KEY STAKEHOLDERS

Finance
• FDOT led the procurement with additional federal
government funding provided through the
Equity Transportation Infrastructure Finance and
10%
Innovation Act (TIFIA), managed by the US
Department of Transportation (US DOT).
TIFIA loan
45%
• The shareholders of the private-sector concession-
Senior debt aire are Meridiam Infrastructure (90 percent), a spe-
45%
cialist infrastructure fund; and Bouygues Public
Travaux (10 percent), a subsidiary of Bouygues
Construction. Bouygues will also carry out the
project construction.
US$760 million
 Case Study 8: Port of Miami Tunnel
Port of Miami Tunnel
P U B L I C - P R I VAT E PA R T N E R S H I P F O R A T E C H N I C A L LY C H A L L E N G I N G P R O J E C T

Structure

Meridiam
Infrastructure Bouygues

55% 45%

115

International senior
debt banks

Florida Department Miami Access

of Transportation Public-private Tunnel Consortium
partnership agreement
TIFIA loan

■ Public sector ■ Equity investors and shareholders ■ Project company ■ Debt providers
 Case Study 8: Port of Miami Tunnel

Port of Miami Tunnel

P U B L I C - P R I VAT E PA R T N E R S H I P F O R A T E C H N I C A L LY C H A L L E N G I N G P R O J E C T

FINANCIAL OVERVIEW LESSONS LEARNED

• The financial structure is summarized in the table • This project demonstrates that complex construc-
below: tion projects can attract private finance, including
investment from an infrastructure fund.
Source Amount Percentage

Equity US$80 million 10% • The project also shows the importance of getting
Senior debt US$340 million 45% the right contract approach—one that reflects the
TIFIA loan US$340 million 45% project specific risks and issues. When this happens,
TOTAL US$760 million 100% private sources will be willing to provide finance.

• Senior debt funding was arranged by a group of 10

international banks. The loan is split into two
tranches: US$310 million is a six-year loan, and
US$30 million is a five- to six-year term depending
116 on when the first availability payment is received.
REFERENCES
FDOT (Florida Department of Transportation). 2007. Port Access
Project: The Port of Miami Tunnel. January 3. Available at
http://www.dot.state.fl.us/construction/PPP/PPPWorkshop/
PortAccessMiami.pdf.

———. 2010. Summary of Major Milestones: Port of Miami Tunnel

Project, January 14. Miami: PMOT. Available at
KEY CONTRACTUAL FEATURES http://www.portofmiamitunnel.com/Documents/
09-1223Milestones.pdf.

Port of Miami Tunnel Project Fact Sheet. Available at

• The contract is based on FDOT making milestone http://www.portofmiamitunnel.com/Documents/Funding.pdf.

payments at various stages of the project’s develop- Port of Miami Tunnel Project website:
ment (totaling US$100 million) and a final accept- http://www.portofmiamitunnel.com/index.html.

ance payment of US$350 million once construction

is complete. FDOT will also provide an availability
payment to MAT subject to the assets being avail-
able and operated and maintained to a pre-defined
condition established by FDOT. The maximum
availability amount is US$32.5 million annually.

KEY DRIVERS FOR THE INVOLVEMENT OF PRIVATE

FINANCE

• This project was first considered nearly 20 years

ago, and has had many different designs and
approaches put forward over the years. It was always
known that whatever solution was picked, it would
be technically challenging. As a result, public
authorities were keen to transfer this design and
construction risk to another party, and a public-pri-
vate partnership approach offered them the route to
do so and also to attract bidders with the relevant
tunneling experience from around the globe.
 Case Study 9: Florida I-595 Road Project

Florida I-595 Road Project

ARRANGING FINANCING DURING AN ECONOMIC CRISIS

Willingness to redistribute credit risk across OVERVIEW

parties can help bring projects to financial close The US$1.674 billion public-private partnership (P3)
project encompasses the reconstruction, widening, and
resurfacing of the 10.5-mile I-595 road corridor under a
35-year design, build, finance, operate, and maintenance
Fast facts concession in Florida. Financing for the project was
complex and severely affected by the global economic
Size US$1.674 billion crisis in 2008, but the concession was awarded in March
Date March 2009 2009 to ACS Infrastructure Development. Construction
of the improvements is expected to be completed in
Location Broward County, Florida, United States spring 2014.
Type Economic

Approach Public private partnership

KEY STAKEHOLDERS
Phase Existing and established
118
Market Developing • The Florida Department of Transportation (FDOT)
led the procurement with additional federal govern-
ment funding provided through the Transportation
Infrastructure Finance and Innovation Act (TIFIA)
Finance managed by the US Department of Transportation
(US DOT).
Concessionaire equity
17% • The private-sector concessionaire is wholly owned
by ACS Infrastructure Development, a subsidiary of
TIFIA loan
Grupo ACS. Dragados USA, a subsidiary of
36% Dragados A.S., is the design-build contractor.

Senior bank debt

47% FINANCIAL OVERVIEW
The financing structure for the project was a combina-
tion of commercial debt and a loan. Originally, it was
US$1.674 billion
anticipated that much of the funding would come
through issues of private activity bonds (PABs). To
encourage this, FDOT obtained approval from US
DOT for a provisional allocation of US$2 billion.
Nonetheless, private financing was all arranged in the
senior debt bank market, with the balance provided by a
TIFIA loan.
 Case Study 9: Florida I-595 Road Project
Florida I-595 Road Project
ARRANGING FINANCING DURING AN ECONOMIC CRISIS

Structure

ACS Infrastructure
Development

100%

Syndicate of
12 international banks
Florida Department of
Transportation (FDOT)
Interstate-595
Concession Express LLC
(retains control of 119
toll rates collection) agreement
Transportation Infrastructure
Finance and Innovation
Act Funding (TIFIA)

Dragados USA
(EPC contractor)

AECOM
(Design subcontractor)

■ Public sector ■ Equity investors and shareholders ■ Project company and related parties ■ Debt providers
 Case Study 9: Florida I-595 Road Project
Florida I-595 Road Project
ARRANGING FINANCING DURING AN ECONOMIC CRISIS
Source of funding Amount Percentage
Concessionaire equity US$290 million
Senior bank debt
Tier 1: US$525 million
Tier 2: US$256 million
TIFIA loan US$603 million
TOTAL US$1,674 million
Senior bank debt was split into two tranches of
short-term debt, one with a term of 9.5 years and the
other with a term of 10 years.
KEY CONTRACTUAL FEATURES
120 • This project is based on availability payments being
made to ACS by FDOT for making the highway
available for use and maintaining it to a required
standard. FDOT retains the revenue risk and will
control toll rates and toll collection on the corridor,
while the ACS consortium will focus on delivering
the requested services for both toll and non-toll
lanes.
• The ACS consortium will be awarded a lump-sum
payment of US$685 million once construction is
completed in 2014. ACS will then receive an annu-
al, inflation-adjusted availability payment of
US$65.9 million for the remainder of the conces-
sion’s life.
• ACS’s main risk is that it performs to the required
levels and that FDOT will honor its payment obli-
gations.
• Such a contractual approach is seen as less risky by
senior debt providers and helps facilitate the raising
of sufficient private finance.
17%
KEY DRIVERS FOR THE INVOLVEMENT OF PRIVATE
FINANCE
47%
Expansion of I-595
36%
100% • In 1992, Hurricane Andrew triggered a large num-
ber of residents in Miami-Dade County to relocate
to neighboring Broward County, increasing the lat-
ter’s population by approximately 200,000 in just
two years after the storm. As a consequence,
Broward’s I-595 expressway became congested far
ahead of forecasts made by FDOT. The goal of the
expansion was to increase throughput of vehicles in
the I-595 corridor.
Private financing
• Traditional pay-as-you-go arrangement for financ-
ing infrastructure projects in Florida meant that
construction phases for I-595 would occur only as
public funding became available. Given the high
cost of the I-595 project at more than US$1.5 bil-
lion, pay-as-you-go would result in a 20-year con-
struction period—not ideal given the severity of
congestion in its present state. Awarding the conces-
sion to a private partner was viewed as a faster
alternative.
• During evaluation of the final bids for concession
in October 2008, Lehman Brothers went bankrupt,
precipitating a major disruption in the commercial
lending market, making the PABs prohibitively
expensive. This prompted ACS to revise their
financing plan and negotiate consequential factors,
such as refinancing risk. As detailed above, debt
financing is based on two tranches of mini perms.
The two tranches reflect the two tranches of rev-
enue that FDOT pays. Although the cost of the
commercial debt increased during bidding, the cost
of the TIFIA loans fell (they are linked to the US
Treasury rate), and so the maximum amount of
TIFIA loans was used. The commercial banks
required additional equity as well.
 Case Study 9: Florida I-595 Road Project
Florida I-595 Road Project
ARRANGING FINANCING DURING AN ECONOMIC CRISIS

• ACS was able to deliver European banks as partici- Wood, D. 2009. “A Stimulating Project Work Begins on $1.8-Billion
Interstate 595 Express-lane Project.” Southeast Construction,
pants in a syndicate loan. These banks would not Features section, November 1: 9 (12): 25.
typically lend in the United States.

LESSONS LEARNED

• Flexibility in payment structure: FDOT’s adop-

tion of availability payments scheme allowed the
department to lower the credit risk of the I-595
project to the concessionaire. This project was able
to target a completion date approximately 15 years
earlier than it would have under a publically
financed approach.

• Availability of public funding: TIFIA’s counter- 121

cyclical lending policies meant that long-term
financing for the project was available at affordable
interest rates. The TIFIA loan stabilized the project’s
cost of capital enough to prompt the syndicate of
banks to lend the remaining sum, enabling ACS to
switch from the bond market to the more afford-
able bank market.

REFERENCES
Dealogic database (accessed November 3, 2009).

FDOT (Florida Department of Transportation). 2009. I-595 Corridor

Roadway Improvements: Value for Money Analysis, June. FDOT.
Available at http://www.transportation-
finance.org/pdf/funding_financing/financing/i595_vfm_0609.pdf.

I-595 Express website: http://www.i-595.com/default.aspx.

Podkul, C. 2008. “ACS-Led Group Wins $1.8bn Florida Toll Road

Bid.” PERE News. Posted October 29. Available at
http://www.perenews.com/Articles.aspx?aID=5824.

———. 2009. “North America Special: I-595 Corridor True Partnership.”

Infrastructure Investor 6 (October): 24–9.
 Case Study 10: The Canada Line

The Canada Line

C O M B I N I N G P U B L I C A N D P R I V AT E F I N A N C E

A combination of both public and private financing OVERVIEW

is complex but can be made to work The Richmond-Airport-Vancouver (RAV) Link proj-
ect, currently renamed the Canada Line, involved the
development of a light rail line under a 35-year design,
build, finance, operate, and maintain (DBFOM) scheme.
Fast facts The Canada Line connects central Richmond, the
Vancouver International Airport, and Waterfront Station
Size C$1.9 billion in downtown Vancouver where passengers can transfer
Date 2005 to other light rail transit lines in the city. The project
value was C$1.9 billion and reached financial close in
Location Vancouver, British Columbia, Canada 2005; it was completed ahead of schedule and on budg-
et in August 2009, in time for the 2010 Winter
Type Economic
Olympics. It is 19 kilometers long, with 16 new stations,
Approach Concession and is aimed at improving current travel times on the
city’s northwest corridor.
Phase New
122
Market Developed

KEY STAKEHOLDERS

Finance • The Transport Authority for Greater Vancouver

Concessionaire equity (known as TransLink) had lead responsibility to pro-
22% cure this project and set up a wholly owned sub-
sidiary, Canada Line Rapid Transit Inc. (RavCo), to
act as its project manager.

Concessionaire • The Government of Canada, the Province of

raised senior British Columbia, the City of Vancouver, and the
Public funding debt
62% 22% Vancouver International Airport Authority provided
public funding for the project.

• InTransitBC—the concessionaire is a special-pur-

pose company owned by SNC-Lavalin (SNC), a
Canadian engineering company—together with
C$1.9 billion
two Canadian public pension funds, namely the
British Columbia Investment Management
Corporation and Caisse de Dépôt et Placement du
Quebec.
 Case Study 10: The Canada Line
The Canada Line
C O M B I N I N G P U B L I C A N D P R I V AT E F I N A N C E

Structure

British Columbia
Investment Caisse de Dépôt
SNC Management et Placement du
Corporation Quebec

33.3% 33.3% 33.3%

Greater Vancouver
Transportation
Authority
(TransLink)

Wholly owned
subsidiary with
joint and several
liability
InTransitBC Limited Senior debt 123
Concession Partnership lenders
agreement
Canada Line Rapid
Transit Inc. (RavCo)

Public funding

Government of
Canada, Province of
British Columbia,
TransLink, Vancouver
Interational Airport, InTransitBC
City of Vancouver SNC-Lavalin
Operations Limited

EPC subcontract Operations and

maintenance
subcontract

■ Public sector ■ Equity investors and shareholders ■ Project company and related parties ■ Debt providers
 Case Study 10: The Canada Line
The Canada Line
C O M B I N I N G P U B L I C A N D P R I V AT E F I N A N C E
FINANCIAL OVERVIEW
• The financing structure for this project was unusual
because it involved contributions from public and
private sources. It is difficult to detail the precise
contributions from each party as most of the public
funds were invested during the construction period,
resulting in an inflation effect. There have also been
agreed-upon changes. However, in broad terms, the
total project costs of C$1.9 billion (2005) were
funded by:
Source of funding Amount Percentage
Concessionaire equity C$120 million
Concessionaire raised senior debt C$600 million
124
Public funding C$1,180 million
TOTAL C$1,900 million
• The commercial senior debt had a term of 28 years.
The debt was underwritten by three international
banks and ultimately syndicated to a further 14
international and Canadian banks.
KEY CONTRACTUAL FEATURES
• Under the terms of the concession agreement,
InTransitBC was to design, build, partly finance,
operate, and maintain the line, including the light
rail rolling stock.
• TransLink retained ownership of the line and control
of the fares. It is also responsible for maintaining
safety standards and ensuring that the private part-
ners comply with performance standards. They pay
InTransitBC from collected fares and other revenue
sources based on availability, quality, and ridership
of Canada Line. These payments are sized to reflect
InTransitBC’s forecast financing and operational and
maintenance costs based on a forecast of ridership.
The contract provides for these costs to be adjusted
periodically to reflect actual ridership.
• InTransitBC took on the design and build risk of
the line and, in turn, contracted with SNC under a
fixed-price, date-certain engineering, procurement,
and construction (EPC) contract to deliver these
works.
• The Concession Agreement included a detailed
construction program and some 1,000 milestone
events in the construction program. Achievement
of these events triggered pre-agreed contributions
of the public funds.
KEY DRIVERS FOR THE INVOLVEMENT OF PRIVATE
6% FINANCE
32%
There appear to be a number of drivers for TransLink
62%
to partner with the private sector:
100%
• The need to find a private-sector partner with
relevant design, construction, and commissioning
expertise who could present a cost-competitive
proposal and is able to contract on a fixed-price,
date-certain basis. This was important as the con-
struction phase was technically challenging, involv-
ing both elevated sections and tunneling.
• The need to partner with a private-sector party
with light rail operational experience.
While these factors are not necessarily financial
drivers, the significant contribution of equity at C$120
million by the concessionaire, together with its ability to
raise commercial debt, represented almost 40 percent of
the project’s financing needs.
TransLink also had to demonstrate at each stage of
the procurement that the public-private partnership rep-
resented better value for money over the whole life of
the concession than the public-only solution.
The mix of public and private finance created some
contractual complexities, in particular:
• Public-sector contributions: The majority of these
contributions were planned to be made during the
construction period subject to achieving predeter-
mined milestones. The concessionaire did not want
the risk of disputes between TransLink and their
 Case Study 10: The Canada Line
The Canada Line
C O M B I N I N G P U B L I C A N D P R I V AT E F I N A N C E

advisors as to whether the milestones were met or

not. The solution to this was the appointment of a
single engineering consultant on whom all parties
would rely.

• Intercreditor: Given the number of funding

sources, there needed to be detailed agreements
describing each funder’s obligations and rights in
situations such as non-payment by another party,
and how the lenders ranked in order of seniority.

• Accessing international banking markets: The

contracts, in particular the financing agreements,
needed to reflect the fact that commercial debt was
being provided mainly by non-domestic banks. A
particular area of focus was tax management.
125

LESSONS LEARNED

• Mixed public and private funding sources create

complex inter-relationships, but this project
demonstrates that workable solutions can be found.

REFERENCES
Canada Line website: http://www.canadaline.ca.

Cleverley, B. 2004. “B.C. Governments Achieve Better Borrowing

Rate.” Times Colonist October 23: C8.

Dealogic database (accessed November 3, 2009).

Euromoney Institutional Investor PLC. 2005. “Canada Line (RAV): A

Long Track.” Project Finance, Deal Analysis December/January
2005. Available at http://www.projectfinancemagazine.com/
default.asp?page=7&PubID=4&ISS=21112&SID=604191.

Luba, F. 2005. “RAV Line Costs Go Up, but Taxpayers Not On the Hook:
Overruns Absorbed by InTransitBC Partners; Digs for Artifacts
Begin.” The Vancouver Province, August 3: 8.
 Case Study 11: BrisConnections

BrisConnections
A C A U T I O N A R Y TA L E O F R E TA I L I N V E S T M E N T I N I N F R A S T R U C T U R E

Retail investors in infrastructure need to OVERVIEW

completely understand the transaction risks and Under a public-private partnership with the Queensland
government, BrisConnections was contracted to design,
rewards
construct, operate, maintain, and finance the Airport
Link for a period of 45 years. The concession was
awarded on May 19, 2008. The project involves the con-
Fast facts struction of the Airport Link, the Northern Busway as
well as the upgrade of the Airport Roundabout. The
Size $A 4.9 billion Airport Link will be a 6.7-kilometer multi-lane elec-
tronic free-flow toll road with dual 5.7-kilometer tun-
Date May 19, 2008 nels. The total cost for the three sections is expected to
Location Brisbane, Queensland, Australia be $A 4.9 billion. The project is scheduled for comple-
tion by mid 2012.
Type Economic The challenges with this project do not concern
the road itself but rather the financing structure and
Approach Concession
126 investor class.
Phase New

Market Developed
KEY STAKEHOLDERS

Finance • The Brisbane City Council, which led the procure-

ment of the project
State works contribution
5% • BrisConnections and its investors

• Thiess John Holland, which is a joint venture

between Thiess and the John Holland Group that
Equity has been contracted to design and construct the
35% projects, as well as to operate and maintain the toll
Debt
road upon completion
60%

$A 4.9 billion
 Case Study 11: BrisConnections
BrisConnections
A C A U T I O N A R Y TA L E O F R E TA I L I N V E S T M E N T I N I N F R A S T R U C T U R E

Structure

Unit trusts stapled together and traded

on the Australian Securities Exchange (ASX)

5
BrisConnections
Holdings Trust
BrisConnections
Investment Trust

127
JF Infrastructure
Limited

Wholly owned
State of Queensland BrisConnections subsidiary
Concession Group
agreement
BrisConnections
Management Company
Limited

(Manages unit trusts)

Thiess John Holland
joint venture to design,
build, and operate

■ Public sector ■ Equity investors and shareholders ■ Project company and related parties ■ Debt providers
 Case Study 11: BrisConnections
BrisConnections
A C A U T I O N A R Y TA L E O F R E TA I L I N V E S T M E N T I N I N F R A S T R U C T U R E
FINANCIAL OVERVIEW
The financing arrangements are the focus of this case
study. The table below provides a summary of the main
components of the financing. This is followed by com-
mentary on the equity raising.
Source of funding Amount Percentage
Equity raised through $A 1,170 million
an initial public offering (IPO)
Equity from a distribution $A 345 million
reinvestment plan
Deferred equity $A 200 million
Bank debt $A 2,928 million
State works contribution $A 267 million
TOTAL $A 4,910 million
128
• At the time of contract signature in March 2008,
the equity private financing was fully underwritten
by Macquarie Capital Advisors and Deutsche Bank.
• The state government was to contribute a total of
$A 1.5 billion.
• In July 2008, the BrisConnections completed an
IPO with an upfront subscription of $A 1 per unit
(in the two stapled unit trusts). At the time of the
IPO, 12 percent of investors was retail. The struc-
ture of this offering also required investors to make
two further subscriptions—of $A 1 per unit held in
2009 and 2010—both of which were underwritten
by Macquarie and Deutsche. A timeline of these
events is shown in Figure 1.
• However, shortly after the IPO the stock price col-
lapsed, at times trading at less than a tenth of a cent,
and a significant number of retail investors bought
significant holdings in the company apparently
unaware of the future financial commitments. One
individual retail investor held 13 percent of the
company.
• The underwriting banks stood by their commit-
ments and are now majority shareholders.
LESSON LEARNED
• The need for transparency: In achieving funding
for the project, investors bought BrisConnections
shares on the market for less than 1 cent each,
without realizing that they would be obligated to
pay $A 1 per share. This has unsettled current and
24% potential investors in BrisConnections.
7% • The need for objective projections: The project
did not elaborate on any worst-case scenarios, such
4%
as if traffic falls below the anticipated average. This
60%
creates an optimistic but unrealistic assessment of
5%
the project’s prospects.
100%
• Complex financial structures and difficulties experi-
enced by toll roads around Australia (such as the
Cross City Tunnel) have negatively impacted
investors in toll roads (see the Case Study on the
Cross City Tunnel).
REFERENCES
BrisConnections website: http://www.brisconnect.com/au.
BrisConnections AirportLink NorthernBusway
AirportRoundaboutUpgrade. Fact sheet. Available at
http://www.brisconnections.com.au/Portals/0/docs/Fact%20sheet
%20Project%20overview_July2009.pdf.
T&TI (Tunnels & Tunnelling International). 2008. “BrisConnections
Picked for Airport Link.” Tunnels & Tunnelling International, July:
12. Available at
http://www.pbworld.com/news_events/press_room/news/
tt_international_7_2008.pdf.
 Case Study 11: BrisConnections
BrisConnections
A C A U T I O N A R Y TA L E O F R E TA I L I N V E S T M E N T I N I N F R A S T R U C T U R E

Figure 1: BrisConnections: Timeline of events

July 2008 January 2010

Listed on ASX Third $A1

initial installment
subscription due
A$1

2008 2009 2010

March 2008 April 2009 Mid 2010 129

Concession Second $A1 Construction
awarded installment completed
due
Appendices
Appendix A
An Infrastructure Primer
 A.1: Sources of Debt and Equity
APPENDIX A.1 As highlighted in Chapter 1.1, estimates suggest that
annual investment in infrastructure needs to be around
5 percent of global GDP or US$ 3 trillion per annum.
Sources of Debt and Equity Currently only US$ 1 trillion per annum of private
funding is going into infrastructure. Hence, US$ 2 tril-
lion per annum is needed to fund the infrastructure
financing gap.
From a financing perspective, infrastructure opportu-
nities are usually capital intensive, there is a tangible asset
to operate and maintain, and the asset is expected to gen-
erate cash over the long term. Infrastructure opportunities
are classified according to various categories including
type of project or enterprise, contractual approach, phase
of asset development and stage of market development.
Both equity and debt can be used to finance infra-
structure projects. While evaluating the financing of
infrastructure projects, careful consideration needs to be
given to risk and uncertainty.
Appendix A of this Report aims to provide a
“primer” on the infrastructure finance market for those
who may be less familiar with it. It offers an overview
of different sources of finance (both debt and equity)
and how finance providers assess infrastructure opportu-
nities. Such assessments include an analysis of risk, how
returns are measured, the role of financing enablers such
as multilateral banks and export credit agencies, and a
summary of some different contractual approaches. This 135
chapter introduces the concept of capital structure and
leverage, cash flow analysis, and the options for the con-
tractual approach.

There are many different sources of debt and equity

and different routes to market for investors
Using the term private finance can gloss over the fact that
there are many different types of equity and debt private
finance that might be lent or invested in infrastructure.
The next chapter will describe each of these sources in
more detail. Figure 1 is a high-level summary of the
sources.
Table 1 seeks to describe the different routes avail-
able to different classes of investors who are interested
in investing in infrastructure. For example, some private
pension funds invest in both the equity and debt

Table 1: Routes available for investment in

infrastructure
Debt Equity
Public Muni
capital bond Private Listed Private
Investor type mkts mkts placement Direct fund fund

Corporations ● ● ●
High net worth individuals ● ● ● ●
Insurers ● ● ● ● ●
Private pension funds ● ● ● ◗ ● ●
Public bodies ● ●
Public pension funds ● ● ● ◗ ● ●

Note: ◗ = some evidence; ● = established route.

 A.1: Sources of Debt and Equity

Figure 1: Sources of debt and equity

1a: Equity 1b: Debt

ment
lace
vate p
Pri
l
De Com

ipa
or ve ts
rke me

nic
at
ma r

Mu
er

lo
Corporate

ci
pe
Op

l
esale bankin

al
ita
r
ho l

de
Cap
sue
W g

bt
Public is
EQUITY DEBT

ed
In st St l
List

it u ti o n a l ate ra
m u ltil a t e
ct
Di

ec
re

di
r

t In

ate
Priv

136
elements of infrastructure projects by buying bonds or
investing in infrastructure funds. There is also evidence
that some pension funds are now investing directly in
assets and enterprises.1
Before surveying the sources of private finance in
detail in later chapters, we review here the main princi-
ples that underpin the capital and contractual structures
used for infrastructure projects. This introduction will
describe:
• what a typical capital structure might be, including
a brief commentary on the theory of what drives
that structure;
• the dynamics of a typical asset or enterprise cash
flow and priority of payments; and
• what a transaction contractual structure may look
like for the four approaches we have identified—
that is, partnership, concession, privatization, and
licensing arrangement.
The capital structure reflects not only the risks and
opportunities in a market but also external factors
such as tax policy
The capital structure is the relationship between debt
(and classes of debt) and equity, often referred to as lever-
age or gearing.
It was Modigliani and Miller who described the
proposition that a firm cannot change the total value of
its securities just by splitting its cash flows into different
streams;2 although the split does affect the returns each
investor class may expect to receive, the total value of
the enterprise is unchanged. This concept is very simply
illustrated in Figure 2. The complication is that the
proposition assumes that decisions are being made in
perfect capital markets.
Further works, such as that by Brealey and Myers,3
have highlighted the imperfections that can affect capital
structure. Examples of these limitations include taxes,
the cost of financial distress and bankruptcy, and the cost
of making and enforcing complicated debt contracts.
The impact of taxation policy is of particular
importance and needs to be considered carefully for
each tax regime under which an investment is being
made. For example, under some tax regimes, interest
expense is tax deductible and thus reduces the amount
of tax paid at the company level. This can encourage
more debt and thus higher leverage, without changing
any other factors relating to the enterprise. However, for
the purposes of this Report, we do not consider or com-
ment on the specific impact of taxation policy.
The capital structure or leverage can affect the
overall enterprise value and the risk-reward proposition
of the different types of cash flow. Some examples are:
• The level of return that each investor class expects
to receive will reflect the level of risk that the

Figure 2: Effect of capital structure on overall value
Although the proportion of debt and equity may
change, the total value of the enterprise is
unchanged.
■ Equity ■ Debt
Enterprise value
Company A Company B
investors in that class are prepared to take, partly in
relation to other investors in the same transaction
and partly in relation to the risk and rewards of
alternative or competing investment options.
• A highly leveraged enterprise may be regarded as
carrying higher risk than one with less debt. This is
because debt costs are not discretionary, and failure
to meet those costs may ultimately lead to a loan
default, which in turn could lead to the demise of
the enterprise. However, equity payments or divi-
dends are discretionary. Clearly the ability to pay
debt costs is closely linked to having the revenue to
make those payments (alongside controlling other
operating costs).
However, we cannot say that “high leverage” is bad
and “low leverage“ is good without first understanding
the dynamics of the particular enterprise or sector we
are reviewing, taking into account both the nature and
predictability of revenue and costs. Indeed, the question
as to whether leverage is random across industries must
be asked. Figure 3 shows some leverage amounts for a
variety of enterprise sectors and some infrastructure-
specific ventures. That companies operating within the
same industry group have similar leverage should be
expected, as they will be operating under similar condi-
tions and risks—for example, predictability of revenues,
business cycles, capital investment requirements, and
opportunities for growth.
A.1: Sources of Debt and Equity
In certain sectors, such as media, leverage is typically
below 40 percent but in the public-private partnership
(PPP) sector it may be more than 90 percent. The main
reasons for this are the difference in the risk profiles
between the two sectors, their respective equity
investors’ appetite for risk, and their ability to repay
debt. The high leverage of a typical PPP transaction
reflects the perceived low risk of long-term contracted
revenues, often with a sovereign counterparty, fixed
costs, and detailed contractual arrangements.
Figure 3 is also a snapshot in time, 4 as the analysis
is primarily based on information for the period
between 2007 and 2009, inclusive. What is interesting is
how leverage can change and why. For example, the
current shortage of capital is lowering the debt amount
and increasing the equity requirement across many
industries, but this is happening without regard to the
actual performance of an individual asset or market sec-
tor.
The capital structure will help determine the cost of
the transaction
There are two main reasons why the capital structure is
important. First, understanding the likely leverage will
give an indication of the amount of debt and equity that
may be needed to finance an infrastructure opportunity. 137
Second, knowing the likely proportion of debt to equity
will help determine the cost of the transaction because
equity carries more risk than debt and is also a more
expensive form of finance.
Any assessment of an infrastructure opportunity will
include an analysis of the sources and uses of cash
over the whole investment period
A focus on cash flows and the ability of the infrastructure
asset or enterprise to generate cash are two key elements
that define the infrastructure investment proposition.
The cash can come in many forms, but in every case
there is a link between the availability/performance of
the infrastructure and the receipt of the funds. Examples
of sources of cash are:
• individual user-based payments—for example, tolls
or “fare box” payments and utility charges;
• access charges—such as those for airports, ports, and
railways;
• public authority payments—for example, shadow
tolls, grants and/or subsidies; and
• off-take fees—such as those for power generation.
Often these payments are regulated, so there is a limit
on their amount.
 A.1: Sources of Debt and Equity

Figure 3: Leverage across a variety of industry and infrastructure sectors

■ A ■ B ■ C

Global oil & gas

Global media

Supermarket chain

Banks*

Real toll road concession

Global construction

Health PPP project

Availability-based PPP road concession

0.0 0.2 0.4 0.6 0.8 1.0

Leverage (Ratio of debt to overall debt and equity)

* All three banks are based in the same country.

138

This focus on cash flow means that any analysis of
an infrastructure investment proposition will consider
three elements:
• revenue,
• operating costs (and capital costs if applicable), and
• debt costs.
Further, if the asset is operated under a concession
contract (i.e. under a finite operation period), debt may
not be available for parts of the concession period. So,
once the debt is repaid, the free cash flow will be rev-
enue less operating costs only, i.e.
free cash flow = revenue less debt service less
operating costs
Given that infrastructure is a long-term proposition,
potential private finance investors and lenders will focus
on the predictability of each of the elements of free cash
flow and how those elements might change over time
or due to circumstances. This analysis will help to define
not only the capital structure but also some of the
approaches to contract.
Although we highlighted some of the challenges of
forecasting revenue and operating costs in Chapter 1.3,
it is worth mentioning here that private financiers will
not look at the different cash flow elements in isolation.
Rather it is the relationship between them that is
important. For example, if the revenue stream is subject
to variation such as seasonality or is linked to GDP in
some way, then private investors will prefer the operat-
ing costs to also be variable so that they can flex those
costs to reflect seasonal adjustments or the impact of
GDP. A proposition that has variable revenue but a high
proportion of fixed operating costs is vulnerable in rev-
enue downturns (since the free cash flow will decrease,
or even become negative). More equity (or less leverage)
may be needed to provide some cushion for times when
revenue is constrained.
Private finance investors and lenders will focus on
both the predictability of cash flows and priority of
payments of financial instruments
As with any corporate proposition, expenses and taxes
are high in the order of payments and debt ranks above
any payments to equity.
Figure 4 shows that, for infrastructure projects, a
range of reserve accounts may often be required. These
reserves may be for major maintenance of the asset or to
deal with changes in law. The requirement for these
reserves will come from the lenders and are an addition-
al cost of private finance.
 A.1: Sources of Debt and Equity
Figure 4: Priority of cash payments

Revenue
Priority of cash payments

Expenses

Operating costs Capital costs

Tax
Cash available for debt service
Debt costs

Debt principal Debt interest

Reserve accounts
Lenders may require some reserve
accounts to be funded before debt service
Distributions to equity

139

There are many ways public and private parties may each of these cases the public sector will bring to the
organize themselves transaction either an existing infrastructure asset or an
There is no fixed way the public- and private- opportunity to develop one. In the case of a partnership,
sector parties organize themselves and contribute to an they will also contribute some equity to the enterprise.
opportunity, but there are some framing principles. There may also be some regulatory framework associat-
Figure 5 provides a high-level summary of how the ed with the contractual arrangement, in particular
public and private parties might come together for an where the approach is to privatize or license the infra-
infrastructure project. structure.
On the private-sector side, the shareholder(s) may
channel their investment into a special company whose
sole purpose would be to develop or operate the infra-
structure. Or the asset/enterprise may be a subsidiary of
their existing business.
The subsidiary route is really only a possibility if
there is a single shareholder and limited debt require-
ments that can be provided under more general corpo-
rate facilities. If there are multiple shareholders and sig-
nificant debt requirements, then there is usually a desire
to ring-fence the debt and equity to the individual
asset/infrastructure—hence the common use of the spe-
cial company.
Also on the private-sector side, there may well be
ancillary subcontracts to build an asset and/or provide
services. But there are also many examples of the
employees or services being provided by the asset com-
pany.
On the public-sector side, four main contracting
options are described at the right side of Figure 5. In
 A.1: Sources of Debt and Equity

Figure 5: Illustration of how public and private parties may collaborate for an infrastructure project

Private parties

Debt
Option 1: partnership
Lenders
Debt
Special purpose
vehicle

Equity
Shareholders Option 2: concession
Public
Equity party
Asset or
(brings asset
enterprise
or opportunity
to the
Designers & Option 3: license transaction)
Contract
Builders

Operators Contract Option 4: privatization

140

TAKE-AWAYS

Capital structure Priority of payments

• The amount of debt and equity invested in an enterprise is • Priority of payments is no different from other corporate
not random but is a combination of the risk of an individ- opportunities, but may include some additional mecha-
ual opportunity/project and that of competing investment nisms to protect the debt stake.
opportunities, along with the impact of market imperfec-
tions such as tax policy and cost of bankruptcy.
Contractual structure
• Understanding the likely leverage will help determine both
the cost and the amount of debt and equity needed to • There is no fixed contractual approach, but most will be a
fund an opportunity. variant of public and private options for collaboration (see
Figure 5).
• Some infrastructure financing is based on highly
leveraged transactions.

Cash flow

• Infrastructure is a cash-driven market.

• Private financiers’ analysis of a potential opportunity will

focus on the relationship between revenue and costs.
 2.1: Sources of Debt and Equity
Notes
1 There are a number of examples of such direct investments.
Although we have not compiled a complete list of such invest-
ments, examples include the Ontario Teachers’ Pension Plan’s
stake in airports and container ports (see OTPP 2010); the Canada
Pension Plan Investment Board also has stakes in a wide range of
infrastructure, including energy distribution and water (see CPP
2010).

2 Modigliani and Miller 1958.

3 Brealey and Myers 2003.

4 This analysis is primarily based on levels of total debt and share-

holder equity reported in annual accounts of representative com-
panies in each industry sector, primarily in the years 2007, 2008,
and 2009.

References
Brealey, R. A. and S. C. Myers. 2003. Principles of Corporate Finance,
7th Ed. New York: McGraw-Hill Irwin.

CPP (Canada Pension Plan) Investment Board. 2010. “Infrastructure

Portfolio.” Available at www.cppib.ca/Results/Financial_Highlights/
infrastructure_investments.html (accessed April 14, 2010).

Modigliani, F. and M. H. Miller. 1958. “The Cost of Capital, Corporation

Finance and the Theory of Investment.” American Economic
Review 48 (June): 261–97.

OTPP (Ontario Teachers’ Pension Plan). 2010. “Top 10 Private Equity

and Infrastructure Investments.” April. Available at
www.otpp.com/wps/wcm/connect/otpp_en/Home/Investments/
Major+Investments/ (accessed April 14, 2010).

141
142
2.1: Sources of Debt and Equity
 A.2: A Source of Private Finance: Equity
APPENDIX A.2 As described in Appendix A.1, most infrastructure assets
or enterprises will be partly funded by equity (see
Figure 1). The two main sources of equity are usually
A Source of Private Finance: described as corporate or institutional. The pertinent
features of these sources are described in this chapter.
Equity This chapter also provides information on the kinds of
returns that equity investors seek and how these returns
are measured by considering the net present value
(NPV) vs. the internal rate of return (IRR).
Understanding the dynamics of the infrastructure
equity market is important because it is usually the

Figure 1: Sources of equity

De
or ve
at

er

lo
Corporate

pe
Op

r
EQUITY

ed
In st 143

List
it u ti o n a l

ct
Di

ec

re
di
r

t In

ate
Priv

equity investors who will lead the private finance

engagement in an infrastructure opportunity.

Corporate equity is an important source of private

finance for infrastructure, but it may have different
investment drivers than institutional equity
Although much of the focus on potential sources of
funding is on commercial debt and institutional equity,
there remains an important role for corporate equity.
Corporate equity is typically provided by companies
that will have a deliverer role in the project. Deliverer
roles include, among others, those of developer, con-
struction contractor, and facilities operator. Corporate
equity has funded numerous projects and enterprises in
a market’s early stage of development, particularly when
the sector is in its new and innovative phase.
For some companies, this investment is very much
an ancillary activity and a means to an end—it is a way
of securing the “prize” of a significant contract for the
company’s core activity. In such a case, the company
needs to consider its interest in the transaction should
 A.2: A Source of Private Finance: Equity

that role come to an end (say, when construction has Figure 2: Infrastructure investors by firm type
been completed). The company also needs to consider
how the contractual structure deals with any potential
conflicts between its roles as an investor and as a con-
tractor.
For other companies, corporate equity has come 4% 4%
4%
to form a main part of their core business. The develop- 24%
7%
ment of Ferrovial over the last half century illustrates
this relation between the investment activity and the 7%
core business of a company (Table 1).
8% 13%

Institutional equity comes from a diverse range of 8%

sources and invests in a wide range of infrastructure 12%
9%
For the purposes of this Report, the term institutional
equity refers to the capital raised from institutional
investors and, very occasionally, from some high net
worth individuals. Figure 2 illustrates this diversity of
■ Public pension funds ■ Fund of funds managers
investors in infrastructure funds.
■ Other ■ Insurance companies
A lot of institutional equity has been committed to
■ Private-sector pension ■ Superannuation
or invested in infrastructure funds, although there are ■ funds ■ schemes
also examples of institutional equity investing directly in ■ Banks ■ Investment companies
assets. For example, in the United Kingdom, lending ■ Asset managers
■ Sovereign wealth funds
banks such as the Royal Bank of Scotland and Barclays ■ Government agencies
invested equity in the United Kingdom’s Private

Table 1: Development of Ferrovial in Spain

144
Years Action
1950s Founded as a construction company with a focus on major
infrastructure projects in Spain—for example, railway
building.
1960s Expands business outside Spain but with a continued focus
on major infrastructure. At the end of the decade, the com-
pany starts to expand into real estate development and
invests in its first road concession in Spain.
1970s Continues to expand the construction business by geogra-
phy and sectors. Invests in a second road concession in
Spain.
1980s Invests in a third road concession in Spain. Constructs
many projects linked to the 1992 Barcelona Olympics.
1990s Restructures to create a separate construction company
(Ferrovial Agroman) and concession company (Cintra).
Invests in its first airport concession and telephone opera-
tor; develops asset operational activities, including waste
and facilities management.
2000 Continues investment in concessions; acquires Amey, a
to company active in the United Kingdom’s social
present infrastructure market; and BAA, the management company
operating seven UK airports, including London Heathrow.
Invests in infrastructure including the Chicago Skyway
project, the Canadian ETR 407 road, and the Indiana toll
road.
In October 2009, Cintra merged with Ferrovial.
Source: World Economic Forum interpretation of information from Grupo
Ferrovial History, available at http://www.ferrovial.com/en/index.asp?
MP=14&MS=241&MN=2.
Note: The Infrastructure/concessions business contributes approximately
70 percent of either the group’s earnings before interest and tax or the
balance sheet assets profit in the year ending December 2008.
Source: Prequin, 2009.
Note: The figure shows number of institutions investing in infrastructure
(rather than the amounts invested).
Finance Initiative (PFI) projects. Further, there is
increasing evidence that other sources of institutional
equity—for example, some pension funds and sovereign
wealth funds—are also looking to invest directly in
infrastructure projects. It is notable that the skills, risk,
and aims for these types of investment are different from
those of the fund route.
If the route to direct investment is through an
intermediary fund, then funds can either be listed (i.e.,
publicly traded on stock exchanges) or unlisted (equity
that is not publicly traded). Many funds are based on a
limited partnership model (see Figure 3).
When funds are being raised, the fund sponsor will
describe the planned scope of the fund. For example,
some funds—such as an airports fund or an established-
project-only fund—are focused on a particular sector,
geographic area, or asset. Others have a more general
approach and seek investment opportunities that meet
the characteristics of the broader definition of infrastruc-
ture outlined in Chapter 1.1. This definition considers
infrastructure to be a group of capital-intensive projects
that develop and operate tangible assets with the pur-
pose of generating a long-term cash flow. The diversity
of infrastructure investments is significant, although
those in energy, transport, water, and renewables seem to
be the most sought after, as illustrated in Figure 4.
 A.2: A Source of Private Finance: Equity
Figure 3: Limited partnership model Infrastructure may provide portfolio diversification for
investors and returns that match liabilities
Although we are dedicating an entire report to the
topic, infrastructure finance is a very small part of the
General broader financial market. So what does it offer institu-
partner
(GP) Board
tional investors? As described in Chapter 1.1, infrastruc-
ture opportunities offer long-term, often highly pre-
dictable or stable returns. Thus infrastructure finance is
Investors as General Investment attractive to institutional investors because it can offer:
limited partners partner advisor

receive return on receives return on provides • sector- and time-horizon diversification within
committed capital committed capital and investment advice
a management fee and receives fee
their portfolios, and/or

• returns suitable for their risk profile.

The extent of portfolio diversification that infra-

Fund structure investment can offer is open to challenge and
invests equity and will depend on its type. For example, the performance
receives returns
and investment returns of some types of infrastructure—
such as airport and ports—can be closely correlated to
national economic performance.
The risk profile of infrastructure is particularly per-
tinent to pension funds. Infrastructure offers pension
Underlying funds an alternative to government bonds or treasuries,
investments
or project by providing one of the few other opportunities for
companies long-term investing.
145
Source: World Economic Forum analysis.

Figure 4: Infrastructure fundraising by asset type preferences: January 2007–June 2009

Proportion of funds showing preference

60

50

40

30

20

10

0
Aviation/Aerospace
Bridges
Cleantech/Renewable energy
Defense
Distribution/Storage facilities
Education facilities
Energy
Environmental services
Healthcare/Medical facilities
Logistics
Natural resources
Parking lots
Prisons
Railway
Roads
Sea ports
Senior homes
Social (general)
Telecoms
Transportation
Tunnels
Utilities
Waste management
Water

Source: Preqin, 2009.

 A.2: A Source of Private Finance: Equity

Figure 5: Distribution of infrastructure investors by Figure 6: Infrastructure fundraising, 2004–09

source of infrastructure allocation (first half)

40 40

Aggregate capital raised (US$ billions)

16%
30 30

Number of funds
53% 20 20

31%

10 10

0 0
2004 2005 2006 2007 2008 2009

■ Seen as separate infrastructure allocation

■ Seen as part of private equity allocation ■ Aggretate capital ● Number of funds
■ Seen as part of real assets allocation ■ raised (US$ billions)

146 Source: Preqin, 2009. Source: Based on data from Preqin, 2009.
Note: The split is determined by number of investors sampled.

The money available to invest in infrastructure has
increased significantly in recent years, but investors
differ in how they classify investments
Until recently, an institutional investor’s allocation of
equity to infrastructure was part of its allocation to
alternative investment markets. This often fell within
the allocation for real estate within the alternative
investment category. Consequently, infrastructure was
a niche within a niche. This meant that little, if any,
available investment went to infrastructure. But this has
changed in recent years, and for an increasing number
of institutional investors infrastructure now has its own
allocation within their portfolio. The proportion of
allocations is illustrated in Figure 5.
The growth in infrastructure funds is illustrated by
Figure 6, which shows that over the past five years from
2004 to 2008, an aggregate of US$115.2 billion was
raised by 122 funds.
Although fund sizes vary greatly by geography, as
shown in Figure 7, what is notable about this graph is
the emergence of the mega fund, with more than US$1
billion to invest. The mega fund phenomenon began in
the United States in 2006 and followed into Europe.
Despite the global economic crisis in 2008–09,
fundraising has continued. For example, in October
2009, Actis, a global private equity fund focused on
emerging markets, closed a US$750 million fund-
raising for investment in infrastructure across emerging
markets.1 While funds raised in 2009 are significantly less
than those raised in 2008, the number of funds seeking
investors has actually increased in 2009 compared to
2008—see Figure 8.
It is startling is that over 70 percent of these funds
are being launched by first-time infrastructure fund
managers, as shown in Figure 9. This figure is probably
an indication that, although private finance has been
investing in infrastructure for many years, the emergence
of institutional equity is relatively new and still under-
going growing pains.
The infrastructure fund market offers a range of
approaches to the market
While there are clearly many complexities of the infra-
structure fund sector that could fill numerous academic
publications, we have picked out some of the various
approaches and features that are most commonly dis-
cussed, namely:
• listed vs. unlisted funds,
 A.2: A Source of Private Finance: Equity
Figure 7: Average fund size by region, 2004–08 Figure 8: Growth of infrastructure funds launched from
January 2007 to June 2009

Average fund size (US$ billions) 4 100

80
3

60

40

1
20

0 0
2004 2005 2006 2007 2008 January January January June
2007 2008 2009 2009

■ Europe
■ Number of funds raised ■ Aggregate target of
■ United States ■ funds raised
■ Other ■ (US$ billions)

Source: Preqin, 2009. Source: Preqin, 2009. 147

Figure 9: Unlisted fund managers by number of funds • open-ended vs. close-ended funds,
launched • primary vs. secondary or follow-on funds,
• seed assets, and
• leverage or gearing of a fund.

14%
The listed vs. unlisted fund approach
The majority of specialized infrastructure funds, includ-
ing all those in the top 10, are unlisted (see Figure 10).
14% Debate continues on the advantages and disadvantages,
briefly summarized in Table 2, of each approach. The
emergence of listed funds has been focused in only a
72% few countries: 88 percent of listed funds in 2009 were
managed out of Australia, Canada, the United Kingdom,
or the United States, as seen in Figure 11.
It is worth noting that the impact of the credit
crunch has been markedly different for listed and unlist-
ed funds. The unlisted funds have largely continued
■ 1 fund activity as before, although they have had to deal with
■ 2 funds the consequential impact on their underlying invest-
■ 3 funds or more ments. The listed funds, however, have had to deal with
the twin effects of their general fall in share prices
(given their correlation to stock market performance)
and, where the fund is corporate-sponsored, the issue of
any particular pressure on that company’s share price.
This is illustrated in Figure 12, which compares the per-

Source: Preqin, 2009.

 A.2: A Source of Private Finance: Equity

Figure 10: Ten largest infrastructure funds, March 2009 Figure 11: Listed fund market by fund manager location,
2009

9,000
6%

7,500 12%

39%
6,000
(US$ billions)

18%
4,500

3,000

25%
1,500

0
2005 2006 2007 2008 2009 2010

GS IP 2 7,500 GIP 1 5,640

MEIP 3 7,280 MIP 1 4,000 ■ Australia ■ United Kingdom
GS IP 6,500 MSI 4,000 ■ Canada ■ Other
MEIP 2 6,698 CIP 4,000
■ United States
MIP 2 6,000 AIG Highstar 3 3,500

148 Note: Years refer to the year the fund was set up. Based on currency valua- Source: Preqin, 2009.
tions in March, 2009; euro to US dollar exchange rate of 1.456. GS IP 2 = GS
Infrastructure Partners II; MEIP 3= Macquarie European Infrastructure
Partners III; GS IP = GS Infrastructure Partners; MEIP 2 = Macquarie
European Infrastructure Partners II; MIP 2 = Macquarie Infrastructure
Partners II’ GIP 1 = Global Infrastructure Partners I; MIP 1 = Macquarie
Infrastructure Partners I; MSI = Morgan Stanley Infrastructure; CIP = Citi
Infrastructure Partners; AIG Highstar 3 = AIG Highstar Capital III.

formance of Australian listed infrastructure funds to the
Australian Securities Exchange (ASX). Since the crash in
2008, some infrastructure shares have recovered to track
the ASX, but others remain well below this level. There
is some speculation that the collapse of the Australian
investment and advisory company Babcock & Brown
and the difficulties faced by some the other listed funds
in Australia in 2008 has cast a shadow on the listed fund
model. There is also a question as to whether this is pri-
marily an Australian market issue or a signal of a general
move away from the listed approach.

Table 2: Summary of characteristics of listed and Open-ended vs. close-ended funds

unlisted funds Funds can be structured as either open-ended or close-
Listed funds Unlisted funds
ended. Open-ended funds provide investors with the
opportunity, but not necessarily the obligation, to
• Provide liquidity for investment • Illiquid investment
as they are publicly traded increase their commitment or investment in the fund
over time. Close-ended funds have a set, specified size
• May provide overall investment • Potential lack of
and life. A significant number of unlisted infrastructure
diversification diversification
funds that have been set up in the past 3 years have
• Can give rise to value volatility as • Low correlation of been structured as close-ended funds with a total fund
correlation to other asset classes performance to other asset
life of around 10 years; an illustrative fund life is shown
as continuous mark-to-market classes
in Figure 13. Some of consequences of this private
• More accessible and quicker to • Limited opportunities to equity approach are discussed in more detail in Chapter
access by investors enter the market
3.3.

Primary vs. secondary (follow-on) funds

As is indicated above, many established infrastructure
funds have a relatively short life, at circa 10 years, com-
 A.2: A Source of Private Finance: Equity
Figure 12: Performance of Australian listed pared to the potential asset life or contract/concession
infrastructure funds vs. the Australian stock market period of the infrastructure that may be 25 or more
years. At the end of the fund life, investors may opt to
200 crystallize their investment and exit the fund or they
may choose to invest in a follow-on or secondary fund.
Because so many funds have been established in the
last 3–5 years, there is little empirical evidence for
150
what the trend might be, although to date those funds
that have reached their terminal date have been rolled
into a follow-on fund.
100 The term secondary fund can also be applied to funds
where the original or primary fund focused on new
projects with investors who take the risk of the develop-
50 ment or construction of the project/asset. These
investors are focused on a capital gain from an increase
in value of the asset once it is fully operational, rather
0
than on the long-term cash flow that the asset might
2001 2003 2005 2007 2009 generate. Once the projects or assets become fully oper-
ational, the risk profile changes and the return to
investors is cash generated from the project. This change
— Macquarie Infrastructure Group in project risk profile can therefore be an opportunity
— ASX All Ordinaries for the original fund to close and the assets to be
— MAP Group acquired by a secondary fund, supported by investors
— Challenger Infrastructure Fund attracted by the long-term yield.

Source: Thomson Reuters Datastream, available at http://extranet.datas- 149

tream.com//LOGON.ASPX?URL=http://extranet.datastream.com/index.htm
(accessed November 5, 2009).
Note: The raw data have been rebased to 100 on August 8, 2006, the listing
date of the Challenger Infrastructure Fund.

Figure 13: Simplified fund return profile

100 Capital invested ■ Dividend return ■ Capital return

80
Unit of investment (currency)

60

40

20

-20

-40

-60
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
5

5
5

Investment period Distribution period Final

Source: World Economic Analysis, illustrative.

 A.2: A Source of Private Finance: Equity

Table 2: Overview of characteristics of seeded and Seed assets

unseeded funds
Seeded funds Unseeded funds
• The fund will have knowledge of • If the fund is being built up
the seeded part of portfolio and through acquisition of non-
will have an actual performance operational assets, there will
to forecast. be a lag between the invest-
ment date and any return on
investment.
• Assets may include revenue- • There is a risk that
generating investments, which appropriate assets will not
means investors can get a day-1 be acquired and the fund
return on their investment. will not invest its committed
funds, which in turn means
cash is held and the
investors’ commitment does
not attain the yield forecast.
• The fund management team has • There is a risk and cost to
a demonstrable track record of the bidding process.
investing and managing assets.
• Unseeded funds have the
ability to influence the
transaction structure of
investments.
150
Figure 14: Net present value (NPV) vs. internal rate of
return (IRR)
400
Pro
jec
t1
Another variation is whether, on set up, the fund already
has some assets to immediately transfer (or seed) into it
or not. Most primary funds (and all of those in the top
10 listed in Figure 10) are not seeded. But secondary
funds, by their nature, are seeded. A fund that is initially
seeded may not be closed. However, it may seek addi-
tional investments. Table 2 provides a brief overview of
the main features of seeded and unseeded funds. If a
fund is only partially seeded, some of the unseeded fund
risks remain.
Increasing leverage on funds introduces risk
Some funds will attempt to optimize their value for
investors by financially engineering the fund’s capital
structure. The most common approach is to replace
some of the fund’s equity with cheaper bank debt.
However, increasing a fund’s leverage also increases its
risks to equity. Therefore, while determining the level of
leverage, the fund needs to strike a balance between risk
and reward for the equity investors.
One of the significant risks with the leverage
approach occurs when the debt term is shorter than the
fund term. This introduces a refinancing risk to the
fund that did not previously exist (the refinancing risk is
the amount of debt or cost that differs from the original
amounts). Undoubtedly, there are leveraged funds that,
in the current financial market, will not be able to refi-
nance the leverage debt on the same terms; these funds
may face the possibility of equity calls to re-leverage.
Throughout this Report, references are made to the
returns an investor might seek and the risk-return rela-
tionships. The following section summarizes how
investors measure their returns and the decision-making
process that underlies the decision of whether or not to
invest.

The point at which NPV is

zero equals IRR of project The theory: How to measure return: Net present value
300
vs. internal rate of return
When considering a new investment opportunity,
Net present value

investors need to be able to have some way to appraise

200
the opportunity—to make the investment decision that
will add value and not destroy it for them. The method-
Pr

ology used for this investment appraisal needs to be

oj
ec
t2

100 something that (1) can be applied consistently over time

to measure how value changes and (2) allows meaning-
ful comparison between opportunities. The choice is
Opportunity cost
usually between an NPV and an IRR analysis (see
of capital (%) Tables 3 and 4). The relationship between the NPV and
IRR is shown in Figure 14.
–100
Both of these approaches seek to value a series of
cash flows that makes them appropriate for infrastruc-
ture opportunities that are all about generating cash
Source: World Economic Forum, based on Investopedia, available at from an asset. This analysis does not help to assess profit.
http://www.investodedia.com/study-guide/cfa-exam/level-1/ Appreciating the principles of each approach is impor-
corporate-finance/cfa11.asp.
 A.2: A Source of Private Finance: Equity
Figure 15: Distribution of internal rates of return (IRRs) Third, any investor must compete with others and
targeted by fund or investment vehicle so may need to adjust the desired return to make invest-
ments. For example, if an investor overstates the return
he requires for taking the opportunity risk, another
investor will beat him to the investment.
40
In this way, as in any other market, required return
levels are likely to emerge where the market prices each
point on the risk spectrum. All parts of the market,
including infrastructure, show that pricing can be cycli-
30
cal, with periods of high prices or asset bubbles.
Proportion of funds (%)

Infrastructure funds also target a range of returns, and

evidence suggests that for unlisted funds this ranges from
10 to 30 percent on an IRR basis, as seen in Figure 15.
20
Different investors will seek different levels of
return and have different aspirations for where their
return should come from. Sources of return include
10 regular income, yield from the investment, and capital
appreciation through future sale of their stake in the
asset. Such differences will affect the choice of invest-
ment. For example, if a regular income is important,
then investment in existing and established assets is
0
10–13.9 14–17.9 18–21.9 22–25.9 26–29.9
going to be favored. If capital growth is the aim, devel-
oping new infrastructure may be preferable and once
Targeted net to investor IRR (%)
the investment reaches an established level of perform-
ance it can be sold.

Source: Preqin, 2009. 151

Note: The IRR is targeted by fund or investment vehicle.

tant because an NPV approach might suggest that one

particular opportunity is better than another, whereas an
IRR analysis might suggest otherwise.

Determining the risk-adjusted return for an investment

is complex, but there are some market precedents
As we have already indicated, investors will allocate only
a small proportion of their funds to infrastructure. So,
when presented with two different opportunities, how
do they decide which one to invest in? Their analysis
would need to take into account the value created, the
alternative opportunities, the market dynamics, the risk-
reward proposition, and the scale of the opportunity.
First, any investment should be value creating. So
whether NPV or IRR is used, the results should be
positive.
Second, the return should be in line with, or better
than, the returns offered by an equivalent-risk invest-
ment. Investors may analyze comparable-risk invest-
ments to provide a benchmark. However, it is challeng-
ing to identify equivalent-risk investments because the
risk-reward spectrum is not always easily observable.
They may also use complex models such as the Capital
Asset Pricing Model (CAPM), which can calculate the
theoretical required return of an asset.
 A.2: A Source of Private Finance: Equity

Table 3: Net present value (NPV) characteristics

• The basic premise of the NPV calculation is to accept investments with a positive NPV when cash flows are discounted at the opportunity cost of
capital.

• Underpinning this premise are three principles:

— A unit of value today is better to have than a unit of value tomorrow because the future is uncertain
— Some opportunities will be safer or less risky than others
— The market is competitive

• The NPV approach allows someone to give an uncertain future cash flow a value today

The calculation discounts the investment’s expected future cash flows at the opportunity cost of capital (the discount rate). The opportunity cost is
the return an investor forfeits by investing in this opportunity instead of another opportunity of equivalent or comparable risk.

Advantages of approach Disadvantages or common pitfalls

Market competition should mean that return levels are likely to Need to understand the forecast cash flows and the risks to which
emerge for different risk propositions. these cash flows are exposed.

NPV calculation gives a value for the whole period of the investment Deciding the discount rate is complex and assumes there are
and so will not fluctuate over time. efficient capital markets and all investors assess risks and returns
the same way.

NPV calculation can be used to measure a return when capital is rationed. NPV calculation assumes that the risk to the cash flows is steady
over the period being measured.

Need to ensure both the forecast cash flows and discount rate
approach other factors such as inflation and tax on a consistent
basis.
152

Table 4: Internal rate of return (IRR) characteristics

• The basis premise of the IRR calculation is to accept the investment if the opportunity cost of capital of the relevant investment is less than
the investment’s IRR.

• The calculation finds the annual discount rate that, when applied to a cash flow, calculates an NPV of zero.

Advantages of approach Disadvantages or common pitfalls

IRR can be used where cash flows are irregular and the single discount Because this is an annual measure, opportunities that have higher
rate approach used in an NPV analysis is not appropriate. cash flows in early years may appear to be a better proposition.
However, this assumes the money can be reinvested at the same
rate in later years, thus it can be unreliable if capital is rationed.

The result of the IRR calculation can be difficult to interpret if there

are fluctuations between positive and negative cash flows other
than the original investment
 A.2: A Source of Private Finance: Equity
TAKE-AWAYS

Corporate equity Returns

• Corporate equity has historically been a significant
source of private finance for infrastructure.
• Corporate equity is an important source of capital for the
early development of a market, and is likely to be so in the
future.
• The drivers for an investment and a target return can vary
significantly between corporate investors.
• Effective management of conflicts between the deliverer
and investor roles must be carefully considered.
• It is necessary to fully understand the method used to
measure return in order to ensure that this preferred
method is in line with investment performance indicators.
• Comparing investment opportunities is as much an art as
a science, and competition to invest can drive up prices,
thereby driving down returns.
• Investors will have different return expectations, ranging
from regular income to capital growth.

Institutional equity

• There is a wide range of institutional investors that con-

sider infrastructure—such as public and private pension
funds and insurance companies—offer portfolio diversifi-
cation; potentially returns on these investments match
their liabilities.

• The majority of institutional equity is invested through list-

ed or unlisted funds.
153
• There has been a significant increase in funds raised over
the past 10 years, and fundraising has continued despite
the recent global economic crisis.

• There are many routes for institutional equity to invest in

infrastructure. These routes offer a range of risks and
rewards, and the selected route depends on the invest-
ment profile sought.

Note
1 See the Actis website, available at http://www.act.is/ (accessed
February 2010).

References
Grupo Ferrovial History. Available at http://www.ferrovial.com/en/
index.asp?MP=14&MS=241&MN=2 (accessed April 26, 2010).

Investopedia. “CFA Level 1: The NPV Profile.” Tutorials. Available at

http://www.investopedia.com/study-guide/cfa-exam/level-1/
corporate-finance/cfa11.asp, 21 (accessed March 21, 2010).

Preqin. 2009. The 2009 Preqin Infrastructure Review. London: Preqin

Ltd.

Thomson Reuters Datastream. 2009. Available at http://extranet.

datastream.com//LOGON.ASPX?URL=http://extranet.datastream.
com/index.htm (accessed November 5, 2009).
 A.3: A Source of Private Finance: Debt
APPENDIX A.3 This chapter seeks to describe some of the different
sources of debt and their key features. We identify and
discuss two main sources of debt: 1) wholesale banking
A Source of Private Finance: and 2) states or multinationals. The chapter then consid-
ers two other areas: the junior debt market and mono-
Debt line guarantors. Multinationals are considered in greater
depth in Appendix A.4.

Wholesale banking provides two sources of debt

funding: commercial bank debt and capital markets
There are primarily two sources of debt funding in the
wholesale banking markets:

• commercial bank debt, and

• capital markets.

Over the past 10 years, around US$1.3 billion of

funding for infrastructure has been provided through
wholesale banking,1 with the majority—some 88 per-
cent—coming through the commercial bank route. This
is illustrated in Figure 1.

Figure 1: Sources of debt

155

ement
plac
ivate
Pr
l
Com
ipa

ts
rke me
nic

ma r
Mu

ci
l

esale bankin
al
ita

ho l
de
Cap
sue

W g
bt
Public is

DEBT

St l
ate ra
m u ltil a t e

Since 2002, the relative prevalence of commercial

loans vs. market-issued bonds has changed, with loans
providing an increasing share of funding (Figure 2). The
key characteristics of these two sources of debt are dis-
cussed in the following pages.
The financing structure for infrastructure will often
change during the life of an asset as its risk profile
changes. For example, commercial debt may be used to
finance the construction of an asset, but once the asset is
operational, the debt may be refinanced in the capital
markets.
 A.3: A Source of Private Finance: Debt
Figure 2: Infrastructure and Power global loans and
bonds, 1999–2009
200,000
● Total Infrastructure and Power loan
● Total Infrastructure and Power bonds
150,000
US$ millions
100,000
50,000
0
1999 2001 2003 2005 2007 2009
Source: Dealogic (accessed March 4, 2010).
Commercial debt providers’ interest in and approach to
market is varied but follows some basic principles
156
The following is a summary of commercial banks’ inter-
est in the infrastructure markets, the potential depth of
their involvement, the timing and role that they may
take, and the pricing of the debt. A major source of
funding for infrastructure projects is the commercial
bank debt market, which is often referred to as senior
debt, as it ranks highest in the priority of payments.
Historically, banks have been attracted to this sector for
a number of reasons, including:
• The infrastructure sector may give the bank an abil-
ity to match its long-term liabilities, such as mort-
gages or pensions, with a long-term asset.
• It gives diversity to the bank’s loan book.
• Depending on the contractual structure, the sector
can potentially provide an alternative to govern-
ment-issued bonds (i.e., gilts or treasuries).
There is evidence that the highly structured nature
of some types of infrastructure investments can mean
that the debt is relatively low-risk when compared with
other fixed-income alternatives. This will mean, howev-
er, that the risk has been transferred to junior debt and
equity—not that it has disappeared altogether.
Over the next few pages, we will describe some of
the key features of the commercial debt markets,
including:
• the amount of debt,
• timing—when to involve banks,
• organization of banks, including syndicated and
club deals,
• pricing,
• mini-perms, and
• terms of lending.
The amount of debt will depend on the structure and
risk allocation of the opportunity
As illustrated in Appendix A.1, the funding provided by
commercial lenders may be as high as 90 percent of the
total funding required for the project. The potential risk
of such high exposure to project performance means
that the banks will be closely involved in the transac-
tion. They will need to not only negotiate the terms and
price of loans, but also understand the commercial
proposition and the circumstances that could result in
them not being repaid. The banks’ due diligence can
bring rigor to the transaction analysis and reassure the
public authorities about the robustness of the private-
sector proposal.
The point at which banks are introduced to
transactions will vary
There is often some debate about when to involve
banks in the transaction process; there can be significant
variation in this. Some equity investors are confident in
the approach and requirements of lenders, particularly
when an established model or process is being followed.
These investors may be comfortable with advancing a
transaction themselves and bringing in lenders close to
the time the funding is required or even after the trans-
action is closed. Typically, either of these approaches may
be observed when the transaction is being made in a
developed market, sector, or region, where there are
benign or stable banking conditions and strong interest
in the opportunity is anticipated from lenders.
In most other circumstances, equity investors will
probably want to involve banks much earlier in the
process to ensure that they negotiate a transaction to
which the banks will lend.
It is notable that, in the current financial environ-
ment, some transactions are progressing as equity-only
transactions because debt is either unavailable or too
expensive to obtain. In these circumstances, equity
investors anticipate a future improvement in the finan-
cial markets and will look to arrange the bank debt
when that occurs. An interesting development in this
approach is the Chicago Parking Meter acquisition,
where the Morgan Stanley–led consortium put in place
a long-term forward-starting interest rate swap. This was
based on a notional amount of debt despite there being
no debt in place at the time of the transaction.2 This
approach means that the transaction can proceed even

during turbulent times for financing, but it is not a risk-
free approach.
The public-sector party involved in a transaction may
be concerned about the timing of bank involvement.
This is especially true in an underdeveloped market or
when there is something novel or unusual in the propo-
sition as the public sector wants to keep transaction cost
to a minimum.
How banks work together will depend on whether or
not they intend to arrange, underwrite, and syndicate
For many infrastructure projects, there will be one bank
or a small group of banks (usually referred to as the
arranger or lead arrangers) that will negotiate the lending
terms. These banks may also underwrite or provide in
full the total amount of lending required. However, even
when the amount of funding is fully underwritten,
banks will usually want to distribute parts of the lending
(commonly referred to as sell down or syndicate) to other
banks. In this way the banks can limit their exposure to
any one transaction and spread their lending capacity
and risk across a range of opportunities. In the infra-
structure market, the final amount (or final hold) any one
bank will want to hold can vary significantly by sector,
market, and geographic place, but it is unlikely to be
more than US$150 million.
The sell-down or syndication process will typically
take place shortly after a transaction has been conclud-
ed. In many respects, the process is a risk that sits firmly
with the private-sector parties. However, in some cir-
cumstances the public sector may have an interest in this
process. This occurs when the equity investor retains
some risk that—should the arranger bank(s) not achieve
their target final hold amount—the lenders may require
a change in their loan pricing or fees (to make the
proposition more attractive to other banks) or in the
loan structure. Such changes may reduce the potential
level of return for equity investors and also reduce any
contingency in the project. Both reductions might have
the effect of weakening the ability or desire of the equi-
ty investors to deal with deterioration of the transaction
economics or to deal with the unexpected. This is of
particular concern when the project revenue is fixed
and any additional costs cannot be passed on to users.
We have just described the “arrange and syndicate”
process common to many bank-financed transactions
prior to the 2008–09 banking collapse. During and after
this banking crisis, very little infrastructure-related debt
has been arranged on a syndication basis. Instead a “club
bank” approach (a type of “arrange-and-hold” approach)
has been used. In this approach, a number of banks need
to collectively arrange the debt so each bank is prepared
to arrange and hold a fixed proportion of the collective
debt—a proposition that can be extremely complicated
to implement. However, when taking this approach, the
amount each bank will arrange and hold will be less
A.3: A Source of Private Finance: Debt
than the amount they would have been prepared to
underwrite and syndicate. There are two issues with the
club bank approach for borrowers:
• First, large loans will need many banks to come
together. So, if the maximum amount a bank will
arrange and hold is between US$75 million and
US$150 million, then a US$750 loan will need
between 5 and 10 banks. With an arrange-and-
syndicate approach, only 2 or 3 banks would have
been sufficient.
• Second, working with such a large group of arrang-
ing banks means that the negotiation of the facilities
could be complex and time-consuming. Also, terms
may need to come down to the lowest common
denominator in order to reach a deal.
The reason for the move to club deals has come
about primarily because individual banks lack confi-
dence in other banks’ appetite for syndicated debt, the
terms and pricing that those other banks may demand,
and the interbank risk being taken.
The pricing of commercial bank debt has a variable
element that may change over time 157
As with equity investors, banks need to consider the
opportunity cost of the capital for the loan they are
making, a consideration reflected in the interest rate
charged to the borrower.
One of the issues with the bank’s pricing is that the
interbank rate is a variable rate, so the borrower is
exposed to this variable risk over the long term of the
loan. While this is a risk that all borrowers have to man-
age, because of the often long-term nature of infrastruc-
ture borrowing and potentially fixed revenue, the issue
can be particularly acute for the infrastructure sector.
Many borrowers will therefore seek to “fix” this
risk by using interest rate swap instruments, usually with
one or more of the arranger banks. As with the syndica-
tion risk, the result of fixing this risk remains with the
private-sector parties. However, if the public sector is
fixing concession payments to reflect a fixed interest rate
or is retaining any liabilities to pay compensation that
includes the cost of breaking any swap instruments
(which can be significant), the public-sector entities will
need to understand the terms of the swap and their
potential risks.
The pricing of bank debt described above is the
type most commonly offered, but occasionally banks
will offer a fixed price debt. This means that, rather than
the borrower managing the interest rate risk, the bank
manages this risk itself.
 A.3: A Source of Private Finance: Debt
Mini perm debt although increasingly prevalent,
introduces a new set of risks
An increasingly prevalent feature of the commercial
debt markets for infrastructure is a move by banks away
from offering long-term loans (20+ years) to offering
mini perm products.
The main feature of these mini perms is that the
loan period will be for a shorter term (say, 7 to 10
years), often to cover a construction period and a short
period of operations. There are two products (hard and
soft mini perms) offered under the mini perm umbrella
(see Table 1).
Because repaying the debt fully in the shorter term
of the mini perm is unlikely to be feasible—the user or
contract charges would be much higher—the use of
mini perms creates new risks for borrowers that they
may also attempt to pass back or share with public
authorities. These risks may include:
• Refinancing risks: The borrower will have to refi-
nance a hard mini perm and will almost certainly
want to refinance a soft mini perm. So, the borrow-
er will face the risk that banks or capital markets
may not offer better terms in the future. If the
terms are not better in the future, the borrower
may incur increased costs with no ability to pass
158 these on to the public authority or users. Future
financing is particularly critical when a contract is
being bid for a fixed fee over a long-term interest
rate.
• Uncertain hedging strategy: Because the future
debt profile is not known, it is difficult to establish
an effective interest rate hedge at the outset.
• Soft mini perm margin costs: For many PPP-type
contracts, a fixed fee is calculated for the long-term
concession period at the outset of the contract. If
mini perm financing is being proposed, the follow-
ing assumptions need to be considered to calculate
the fixed fee:
—what are the long-term interest costs,
—what are the long-term margin costs, and
—who benefits if the transaction is refinanced
on better terms than the forecast?
The recent dominance of the mini perm type
structure may point to a shift away from the assumption
that long-term bank debt is put in place for projects at
the outset and a shift torwards the approach of arranging
bank debt for a construction period (if there is one)
and, once an asset is operational, refinancing this debt
through the capital markets.
Lenders will negotiate detailed credit agreements
The interest rate charged is not the only concern of the
banks. The loan contract (commonly known as the credit
or facilities agreement) will also deal with other issues,
such as:
• the amount being lent and its associated costs,
including bank fees;
• the requirements of the borrower—things the bor-
rower must do (positive covenants) and must not do
(negative covenants);
• information that must be provided by the borrower
and confirmed at the outset and in the future (rep-
resentations and warranties);
• financial performance—what are the financial tests
and what happens if they are not achieved; and
• what happens when things go wrong and the loan
is in default.
Dealing with what happens when things go wrong
or are not as expected is a major concern for lenders.
This is also evidenced by the lenders’ interest in the
extent of their ability to take control of the asset or
enterprise (to “step in”) should there be a (potential)
default on their loans—this is their security package.
Security might be taken either on physical assets or
on contracts such as the concession agreement or
licence that would give the lenders the same rights and
obligations that the borrower had.
Public-sector parties need to understand financing
arrangements to appreciate the costs, robustness and
sustainability of proposals
Arranging financing is a private-sector risk, but the
public sector should also understand the cost and terms.
Such circumstances may apply in the following situa-
tions, among others:
• If the cost of debt is part of any charges paid by the
public authority, that authority will want assurance
that these costs reflect the current market—by
benchmarking with comparable transactions.
Factors that will be considered are how those costs
may vary over time, and whether such changes will
affect the charge.
• If the financing proposed is novel, or outside
expected parameters, then the public authority will
want to understand its deliverability and robustness.
• In partnership and concession-type transactions, the
rights of the financiers under default and termina-

Table 1: Comparison of hard and soft mini perms
Hard mini perm
• Short legal maturity
• Few, if any, loan principal
payments scheduled, so much of
the loan can be outstanding at its
maturity date
• Borrower must refinance by
maturity date
• Failure to refinance may result in
default
A.3: A Source of Private Finance: Debt
Debt markets are now facing additional problems that
stem from the current financial crisis
Soft mini perm
The global economic crisis that began in 2007 was trig-
• Longer legal maturity date
gered by a banking crisis that created three main prob-
(20+ years)
lems in the infrastructure finance markets:
• Annuity-style repayment
arrangement over the legal
• Virtually no capital markets issuance have taken place
maturity term
other than for some utilities and US municipal
bonds.
• Refinancing “forced” by
significant step-up of the loan
margins over the legal
• Banks have become capital-constrained. Since the
maturity term onset of the crisis, there is less money to lend
(through a combination of repairing balance sheets
• Failure to complete refinanc-
ing will not result in default,
and increasing capital adequacy requirements). This
but—in addition to the higher means that competition between different lending
cost of borrowing—the options is intense and often long-term, relatively
lenders may prevent any or
cheap lending to infrastructure is unattractive when
some payment of dividends
and instead compel this cash
compared with short-term, higher-priced corporate
to be used to repay debt, lending.
thereby accelerating the loan
payment.
• Banks have become liquidity-constrained. The peri-
od over which banks manage their funding has
considerably shortened, which exacerbates the mis-
match banks have between lending long while bor-
rowing over the short term to fund themselves.

tion circumstances need to be understood by all

parties, especially if the authority has obligations to
ensure the continued operation of the facility or to
pay compensation to the financiers.
• Depending on the obligation of the authority to
the debt providers, the authority may want the
right to approve any changes to the financing. This
is important for any infrastructure transaction
where it is highly likely that the financing will
change as the project or enterprise moves through
its life cycle.
There are circumstances where debt may be stapled
Stapled debt usually means that the vendor provides or
arranges the debt for bidders. This is not commonly
offered in the infrastructure sector, but it was offered on
the 2009 sale of Gatwick Airport.3 Stapled debt is cur-
rently being offered for the sale of EdF’s UK power net-
works,4 and is anticipated to be offered for the sale of
HSBC Rail.5
When debt is linked or stapled to the borrower,
anyone acquiring the borrower will need to refinance
the debt on acquisition.
There are also circumstances where different
tranches of funding are stapled together so that one can-
not be refinanced or disposed of separately from the
other. This most commonly occurs when equity invest-
ments—for example, share capital and loan notes—are
stapled together.
However, the impact of these factors has varied 159
significantly among different banks. Some institutions
were able to offer only hard mini perm–style loans;
others continued to lend long. But, it is unclear whether
this remains a long-term strategy or a move to try to
preserve the market.
Bond issuance through the capital markets offers an
alternative to commercial bank debt
The following is a summary of the types of issuance, the
pricing, and the way in which capital markets are
accessed.
A bond is an investment security issued to the capi-
tal markets by an entity that requires cash today in
exchange for the offer of a promised set of future pay-
ments. This is usually structured as a regular coupon
payment (equivalent to bank interest) and a repayment
of the principal amount. It is essentially an “I owe you.”
Bonds are commonly issued by corporate entities and
governments. Clearly, the value of the promise depends
on the creditworthiness of the entity issuing the bond.
Corporate entities issue bonds as an alternative to bank
lending to finance their activities.
Bonds will commonly be listed on a stock
exchange so that they can be freely traded and held by
anybody. This provides the benefit to the issuer of ensur-
ing access to as many investors as possible when
attempting to raise large amounts of cash.
Over the next few pages, we will describe some of
the key features of the capital markets, including:
 A.3: A Source of Private Finance: Debt

Table 2: Summary of rating levels

Agency
S&P rating Moody’s rating Fitch rating Broad definition Grade

AAA Aaa AAA Highest rating. Minimum credit risk, highest credit quality, and
capacity to meet financial obligations is extremely strong.

AA Aa AA Still very high quality credit with low credit risk; capacity to meet
financial obligations is still strong.

A A A High-quality credit; capacity to meet financial obligations is still strong Investment grade
but is susceptible to adverse changes.

BBB Baa BBB Good-quality credit but adverse change is likely to lead to weakened
position.

BBB- Baa3 BBB- Moderate-quality credit and may possess certain speculative
characteristics.

BB, B, All Cs Ba, B, All Cs BB, B, All Cs Speculative characteristics about the credit risk.
Sub-investment grade
D D RD, D Payment default.

Source: Author’s interpretation of rating definitions from agency websites: Moody’s, available at http://www.moodys.com/cust/default.asp; Standard & Poor’s, avail-
able at http://www.standardandpoors.com/home/en/us; and Fitch Ratings, available at http://www.fitchratings.com/index_fitchratings.cfm.
Note: The focus of the agencies’ definitions is on the ability or likelihood of the obligor (person or entity who has obligation to repay debt) to meet their obligations
and what protection there is in the event of bankruptcy. This summary shows the main ratings only. There are interim steps (or notches) between these main
ratings that are indicated either by a number (1, 2, or 3) or a negative or positive sign. For example, there may be an S&P AA+, AA, and AA– or Moody’s Aa1,
Aa2, or Aa3.

• credit ratings, The yield to maturity is the promised yield (the

160
• pricing,
• fixed or index-linked bonds,
• private placement, and
• the process of arranging the finance.
Credit rating is required for most bonds issuances
One key characteristic of a bond is that it will almost
always require a credit rating. A bond is often issued to
investors who may not have the skills and knowledge to
fully understand the risks inherent in that investment. A
credit rating provides an independent assessment from
which the expected return on that investment can be
benchmarked.
There are a number of agencies that will publish
credit ratings; the most commonly consulted are Fitch,
Moody’s, and Standard and Poor’s (S&P). Each agency
will have its own methodologies for measuring risk,
which are readily available on their websites. The rating
provides a view on the likelihood that the “promise”
will be broken—that is, that the issuer will default. A
summary of the key rating levels for these three agencies
is shown in Table 2.
The pricing of bonds is partially based on the charac-
teristics of a predefined benchmark bond
There are two main parts to pricing bonds at their issue:
• the yield to maturity on a benchmark bond, and
• the issue spread.
internal rate of return, or IRR) on the bond if
purchased at the current price and then held to its
maturity. Because the price of a bond may fluctuate over
time, this yield to maturity may fluctuate and so it rep-
resents a point-in-time market observation. The bench-
mark bond is the proxy for a risk-free investment with
an equivalent yield to maturity. And, although you can-
not say that any investment is absolutely risk-free, the
convention is that government issuances, particularly in
developed economies, are considered to be risk-free. For
example, UK gilt-edged securities (gilts) and US
Treasury bonds are generally considered to have zero
risk because it is highly unlikely that either government
would default on payment. Moreover, these bonds are
easily traded (or highly liquid) in a transparent manner.
Therefore they provide a common point to which all
investors can relate.
However, given that governments issue many secu-
rities, the key question is how to decide which govern-
ment security would be the best to consider as a bench-
mark for a particular upcoming bond issue.
Investors will want to identify a government issue
that has a relationship between change in value and
yield to maturity similar to the proposed project bond.
The coefficient that captures this relationship is known
as the modified duration; this can be calculated with refer-
ence to standard formulas and models.
The coupon or issue spread is a risk premium that an
investor will require for accepting the risk specific to an

Figure 3: Components of an annual interest rate for a
bond
Issue spread
Annual interest rate
Yield to maturity on a
relevant benchmark issue
Source: PricewaterhouseCoopers 2006, internal training material.
individual issue. The components of the annual interest
rate or coupon for a bond can be seen in Figure 3.
There may be an additional cost for a monoline
guarantee; this product is covered later in this chapter.
Bonds may be fixed rate or index linked
Conventional bonds will be issued with a fixed coupon
rate so there are known payments to be made by the
borrower to the investor. Fixed coupon bonds represent
the majority of bonds issued. Some issuance is index
linked, so that the borrower’s payments change in line
with the chosen index—often a consumer price index.
For many institutional investors, this can be attractive
because their liabilities may also be index linked, so
these bonds create a better match between payments
received from the bond and its liabilities.
Some bonds are placed privately
A private placement can be tailored a little more easily
to the specifications of one investor. These placements
do not usually exceed about US$150 million, as a single
investor is unlikely to have the appetite to take on much
more risk with one borrower. For anything larger than
US$150 million, the issuer is likely to be better off
incurring the additional costs of listing in order to reap
the benefits of accessing a wider market.
A.3: A Source of Private Finance: Debt
The process of arranging bond finance is different from
arranging commercial bank debt
A notable difference between commercial debt and cap-
ital markets is the process of arranging the finance.
Negotiations with commercial debt providers do not
follow a prescribed or regulated procedure. This has the
benefit of being more flexible, but can mean that there
will be some uncertainty about when negotiations will
be completed, and—until the documents are signed—
there remains a risk that the lenders could introduce
new conditions to the loan, or indeed, on rare occa-
sions, even walk away.
The process for launching a public bond is much
more prescriptive and is regulated by the relevant mar-
ket authority. The main steps in the process are shown
in Figure 4.
In deciding the best debt source, a number of factors
need to be considered
The choice of employing commercial bank debt or cap-
ital market to fund infrastructure needs to take into
account a number of factors. These factors include the
amount of debt to be raised, its term, its risk profile, and
the nature of cash flows expected from the infrastructure
(see Table 3).
161
Municipal bonds comprise a large part of the private
finance for US state and local governments
Although the municipal bond market is not unique to
the United States, it does represent a major source of
private finance for state and local government. The fol-
lowing is a brief overview of the municipal bond mar-
ket and the types of bonds that may be issued. This sum-
mary does not attempt to substitute for the complex
rules, set by the US Internal Revenue Service (IRS),
that govern this market.6
The market is not new: municipalities started to
issue bonds to fund capital developments, such as rail-
ways, in the early 1800s. Nowadays the key driver for
the market is the fact that the interest paid to bondhold-
ers is exempt from federal and state income tax. The
investor universe is primarily retail investors: individuals
investing either directly or through mutual funds.
Types of municipal bonds
With regard to the funding of infrastructure, there are
two sorts of bonds that could be used:
• Government bonds: The proceeds of these bonds
are used to finance the building, operation, and
maintenance of public infrastructure used by the
issuing party or another government party.
Examples of such infrastructure include roads,
schools, libraries, and fire stations.
 A.3: A Source of Private Finance: Debt

Figure 4: Steps in launching a public bond

Steps

Credit
Bond marketing Bond launch Funds flow
assessment

Soft marketing Issue

• Rating agency process • Credit research, • Pricing • Cash in Bank

including rating agency
• Listing application with pre-sales report • Allocation
relevant authority
• Investor road shows • Final prospectus
Issued
• Unpriced offering cir- Price talk
Activities

cular (often called red (Discussion of

herring) or preliminary appropriate price
prospectus for security)

• Book building
(underwriter attempts
to determine price on
basis of demand)

From first engagement with rating agencies, bond launch will take a minimum of 2 months.

162

• Qualified private activity bonds (QPABs): The
proceeds of these bonds must go to capital expendi-
ture, so they may be used either to fund new infra-
structure or to upgrade or refurbish existing infra-
structure.
Government bonds
There are three main types of government bonds issued.
Each type reflects the source and security of monies
used to repay them, as follows:
• General obligation bonds: These bonds are issued
against the general taxing powers of the issuing
authority. The bondholders do not have security
against an individual facility.
• Revenue bonds: These bonds are issued against
revenues received from the operation of an individ-
ual infrastructure asset—for example, a toll road.
The bondholders are likely to have security over
the individual facility.
• Special assessment bonds: These bonds might be
issued to fund infrastructure in a specific area that
will be a catalyst for commercial development in
that area. To reflect the public funding, there might
be a specific tax on the subsequent commercial
development to repay the bonds.
There are a number of variations on these main
types of bonds, each of which deals with state-specific
issues. For example, some bond variations address laws
limiting the issue of debt. Other variations include
bonds that make available different ways to provide for
public infrastructure, such as the leasing of buildings and
equipment, and bonds that are used for short-term
funding needs.
Qualified private activity bonds
The QPABs are bonds where the user of the proceeds is
a nongovernmental body. In the United States, in order
to qualify for the tax-exempt status of government
bonds, the activities on which the proceeds are spent
must be specifically authorized by Congress and meet
the IRS tests.
For many years, these bonds have been authorized
to finance some infrastructure—such as water treatment
and port development—but it was not until 2005 that
the exemption was extended to encompass surface
transportation, including roads and bridges.
These bonds are technically issued by a conduit
vehicle, but the investor credit risk resides with the
underlying private entity.
Historically, interest earned on QPABs has fallen
within the United States’ alternative minimum tax
(AMT) rules. These rules, in effect, put a floor on the
amount of tax deductions an individual can claim.

However, recent tax rule changes have removed QPABs
from the AMT rules, making them a more attractive
investment option. These bonds have also sought to cre-
ate a more diverse investor base to attract sovereign and
foreign investors.
Build America Bonds
The Build America Bonds program is a recent variation
of municipal type bonds. Under the American Recovery
and Reinvestment Act of 2009, state and local govern-
ments that, in the period 2009 and 2010, could have
issued municipal bonds to fund capital expenditure can
instead issue Build America Bonds. If Build America
Bonds are issued, the issuing authority will receive a
direct federal subsidy payment equal to 35 percent of
the total coupon interest paid to investors.7
Municipal market: Size and pricing
It is estimated that municipal bond issuance in the
United States was about US$425 billion in 2007.8 This
fell by about 9 percent in 2008, to US$385 billion. By
November 2009, issuance was about 9 percent below
the 2008 level (see Figure 5).
There has also recently been a considerable increase
in the price of bonds. Historically, the difference in
spread between an AAA-rated bond and a BBB-rated
bond was around 50 basis points, but this difference has
now increased fourfold, to around 200 basis points.
Rating of municipal bonds
There is no legal requirement to rate these bonds, but
there is a market expectation that they will be rated to
demonstrate that they are investment grade. So most
(but not all) are rated, by the same agencies that rate
other bonds.
The role of monoline insurers
The monoline business that became prevalent across
global infrastructure bond issuance developed out of the
US municipal bond market. Prior to the recent eco-
nomic turmoil, an estimated 30 percent of municipal
issuance had a guarantee from a monoline insurer (see
the next section for a discussion of the monoline prod-
uct). However, the use of monoline insurance was not
spread evenly across the market but was focused on
smaller issuances, smaller states, or smaller issuing entities
where investors relied on the due diligence performed
by the monolines rather than their own.
The fact that only about 30 percent of the market
relied on the monoline guarantee has meant that the
limited monoline offering available now has not led to
an overall collapse of municipal bond issuance. Instead,
the limited monoline offering has made issuance much
more difficult for the smaller issues.
A.3: A Source of Private Finance: Debt
Table 3: Factors determining the choice of wholesale
debt
Factor Consideration
Size • Commercial debt has no minimum size; trans-
action costs are the constraining factor. But
there will be a market capacity for any one
project or transaction. This is currently around
US$2 billion, but will vary substantially by mar-
ket, sector, and geography.
• Public bonds are typical for issuance greater
than US$100 million.
• Private placements are typical for issuance
less than US$100 million.
• Capacity in index-linked market is variable,
so this is best considered on a transaction-
by-transaction basis.
Term of • Banks reluctant to lend beyond 25–30 years
required debt and in current market significant lending is
now at 5–10 years.
• Bonds continue to offer much longer tenors.
Risk profile • Can you achieve investment grade (BBB–)?
If not, the bond market is not an option.
Nature of • The bond market is better suited to stable
cash flows cash profiles, since the product is less
flexible. 163
• Bank market loans can be more
flexible and thus easier to change, and so
can be better suited to new, start-up
businesses.
Monoline insurers play an important role for
infrastructure transactions by providing a guarantee
for the bond holders
Guaranteed bonds are issued with a guarantee policy
from a monoline insurer, which will have a very strong
AAA credit rating. This guarantee is sometimes referred
to as a wrap because the guarantee effectively wraps the
underlying project credit rating to give it an AAA rat-
ing. The policy pays out to the investors if the issuer fails
to make a scheduled coupon or principal payment. In
this contract structure, therefore, the monoline insurer is
the primary risk taker; the investors are exposed to the
issuer only if, for some reason, the monoline insurer
itself does not have the ability to pay out under the pol-
icy when called. For providing this guarantee, monolines
will charge an upfront and annual fee.
Why bother issuing a bond with the benefit of such
a policy? The reason is that many infrastructure projects
would otherwise often have a rating of around a BBB
and be exposed to the asssociated risks. Although this is
 A.3: A Source of Private Finance: Debt

Figure 5: Value of municipal bond new issues, 2000–09 Table 4: Credit ratings of monolines, November 2007
and August 2009

S&P financial strength rating

Monoline November 2007 August 2009
500,000 Ambac Assurance Corp AAA stable CC

Assured Guaranty Corp AAA stable AAA negative

400,000 Financial Guaranty AAA stable Rating withdrawn

Insurance Co (FGIC) in April 2009
US$ millions

Financial Security AAA stable AAA negative

Assurance Inc (FSA) (acquired by Assured)
300,000

MBIA Insurance Corp AAA stable BBB

(internally structured)

200,000 XL Capital Assurance Inc AAA stable A negative

Source: Ratings from company websites: Ambac, available at

http://www.ambac.com/; Assured Guaranty, available at
http://www.assuredguaranty.com/; Financial Guaranty Insurance Co., avail-
100,000 able at http://www.fgic.com/; MBIA Inc., available at http://www.mbia.com/;
2000 2002 2004 2006 2008 XL Capital Assurance, available at http://www.xlcapital.com/xlc/xlc/xls.jsp
(all accessed September 2009). World Economic Forum analysis.

Source: Thomson Reuters, Global Public Finance database (accessed

November 13, 2009).

rating agencies are leaning more toward assessing their

164
position as deteriorating than as stable or improving.
still investment grade, it is not sufficient to attract many
This decline in the strength of the monoline ratings
investors. Issuing a bond with a guarantee increases the
has had three main impacts:
institutional appetite for that issue because it expands
the range of institutions able to invest; this in turn
• There has been a marked deterioration of the risk
should bring down the pricing of the bond at issue.
profile of existing projects. This has translated to sig-
Monoline providers also undertake detailed due dili-
nificantly increased project coupons—investors
gence on a transaction and participate in the negotiation
coming into the transaction now would expect a
of the transaction’s contracts, a role that many bond
higher return because they are putting little, if any,
investors believed was a benefit to the project and de-
value to the monoline guarantee. This does not
risked their investment, further increasing institutional
have an impact on the underlying project company
appetite.
but it does indicate where the market might be in
Additionally, the fee paid to the monolines was less
terms of new projects.
than the coupon that would likely be required by
investors to buy the “unwrapped” low investment grade
• Some existing projects will have provisions in their
issue. The monoline guarantee is not only available for
financing documents that mean the project compa-
capital markets but is also used to guarantee some com-
ny has to pay an increased cost to a lender if the
mercial debt.
monoline's rating drops. This is most likely to occur
Given the cost associated with the monoline guar-
where the monoline has guaranteed senior debt—
antee, there is a need to analyze its cost benefit (which
for example, funds lent by the European Investment
will come because investors will require a lower return
Bank.
or coupon) vs. that of an unwrapped issue.
One of the consequences of the current economic
• Overall loss of investor confidence in the value of
crisis and the monolines’ involvement in guaranteeing
the monolines’ guarantee, even if they have retained
mortgage-backed securities and collateralized debt obli-
their AAA rating, has meant that this funding struc-
gations has been a significant change in the position of
ture is currently not a realistic option for bond
the monolines’ ratings. As can be seen in Table 4, in late
issues. This has, in effect, closed much of the bond
2007 there were six AAA-rated monoline insurers, but
market to infrastructure-related issues other than
by August 2009 there was only one: Assured Guaranty
those issues that can achieve ratings attractive to a
(which also now owns FSA). And even Assured
sufficient part of the market in their own right.
Guaranty was on “negative watch,” which means the

Currently the benchmark seems to be a rating of at
least A.
There are other types of commercial bank debt that
might feature in the financing solution
So far the focus on commercial debt has been the senior
debt, but in infrastructure financing there may be other
tranches of debt that have a lower priority than the sen-
ior debt and that may also be unsecured. The two most
common tranches are:
Mezzanine debt
Mezzanine debt is commonly structured as junior senior
debt—that is, the terms of the facilities agreement will
be similar to those of the senior debt, but recognize that
the mezzanine debt is lower in the priority of payment
covenants. This is especially the case for any of the
lenders’ financial tests, which will need to reflect this
lower priority.
Since this is junior debt, it is at a higher risk of
default and so the risk premium or margin is higher—
typically from 2 to 4 percent higher—than the senior
tranche. Mezzanine debt often fills a gap in a financial
TAKE-AWAYS
Commercial debt
• Commercial debt markets are currently in a state of flux,
but the underlying principles of how they approach and
price infrastructure opportunities remain the same.
• When to bring banks into a transaction, how they will
organize themselves, and how they will price the debt and
set the terms of the lending will vary from transaction to
transaction, but some basic principles remain steady—
such as how debt is priced.
• In a number of circumstances, public authorities should
understand the terms of the debt, not solely because of
pricing but also to ensure full understanding of deliver-
ability and robustness of the debt as well as their liabili-
ties and obligations.
The municipal bond market in the United
States
• The municipal bond market in the United States shows
how government policies—in this case tax policy—can
drive the funding options for infrastructure and the poten-
tial use of private finance.
A.3: A Source of Private Finance: Debt
structure when the amount of senior debt available is
insufficient. This debt has so far not been a common
feature in infrastructure lending but it may come to the
fore now.
Subordinated debt
Another common form of debt is subordinated debt. This
is debt that is subordinated to equity. In many ways the
“debt” label is misleading, because its structure is often
more akin to equity than to debt, and it is often in the
form of loan notes or, sometimes, preference shares.
Notes
1 This information has been sourced from Dealogic’s database. The
Dealogic infrastructure sector group includes the following sec-
tors: Airports, Bridges, Defence, Education, Govt Buildings,
Hospital, Other, Police, Port, Rail Infrastructure, Road, Telecom,
Tunnel, Urban Railways (including Light Rail and Mass Rail transit),
Waste and Water & Sewerage. We have also included information
on the Energy/Power sectors, including renewable sources, in the
data. The financing type includes project finance, privatization, and
acquisition finance as well as refinancing.
2 Allison 2009.
3 Bowman 2009.
4 Du Chenne 2010.
165
Capital markets
• The process of issuing bonds through the capital markets
is more structured and regulated than the process of
arranging commercial bank debt.
• Most bonds are issued on public markets, although some
are offered as private placements.
• The way debt is priced and brought to investors in capital
markets is different than it is in commercial debt markets;
for example, capital markets have credit-rating require-
ments.
• The capital market is currently a limited option for infra-
structure because of external failures such as the down-
fall of the monolines (see the last section of this chapter).
(cont’d.)
 A.3: A Source of Private Finance: Debt

TAKE-AWAYS (Cont’d.)

Monoline insurance Other debt

• The collapse of the monoline business model has • There are other sources of debt that may sit between
impacted both existing and future transactions. the senior debt and equity. Its structure and pricing
will depend on the risk it is taking, including elements
• The infrastructure sector has been hit hard because such as where it sits in the repayment priority.
by nature infrastructure bonds are low investment
grade, which attracts fewer potential investors than
higher-rated opportunities.

5 InfraNews 2010.

6 IRS, “Tax Exempt Bonds, Forms, Publications and Training

Materials.” Available at http://www.irs.gov/taxexemptbond/
article/0,,id=132043,00.html (accessed February 2010).

7 IRS 2009. This notice is available at http://www.irs.gov/

newsroom/article/0,,id=206037,00.html.

8 Analysis is from Thomson Reuters, Global Public Finance

database (accessed November 13, 2009).

166
References
Allison, P. 2009. “Morgan Stanley Closes Innovative Derivative for
Chicago Meters Acquisition.” Infra-Americas. October 9. Online at
http://www.infra-americas.com/.

Bowman, L. 2009. “Infrastructure Funds Show their Staying Power.”

Euromoney, May 5. Available at http://www.euromoney.com/
Print.aspx?ArticleID=2194147 (accessed April 21, 2010).

Dealogic. Dealogic database (accessed 2009, 2010).

Du Chenne, J. 2010. “EdF Releases Staple Financing for UK Networks.”

InfraNews January 29. Online at http://www.infranews.com/print/
585151.

InfraNews. 2010. “Banks Finalise Debt Package for HSBC Rail.”

February 26. Online at http://www.infra-news.com/print/684631.

IRS (Internal Revenue Service). “Tax Exempt Bonds, Forms,

Publications and Training Materials.” Available at
http://www.irs.gov/taxexemptbond/article/0,,id=132043,00.html
(accessed February 2010).

———. 2009. “IRS Issues Guidance on New Build America Bonds.”

IRR-2009-33, April 3. Available at http://www.irs.gov/newsroom/
article/0,,id=206037,00.html.
 A.4: Multilateral Lending and Other Enablers
APPENDIX A.4 We have seen how debt and equity sourced from the
wholesale bank markets play important roles in provid-
ing finance for different infrastructure projects. But there
Multilateral Lending and Other are other sources of lending that provide an important
addition to the collection of funding sources.
Enablers
Multilateral financing institutions play a vital role in
the development of infrastructure
Across the globe there are a number of multilateral
institutions (MLIs) that can generally be subdivided into
to multilateral development banks (MDBs) and multilat-
eral financial institutions (MFIs).1 Both of these groups
of institutions play a vital role not only in the funding
of infrastructure but also in providing transaction know-
how and support to develop infrastructure programs and
deliver projects. Although, because of terminology, these
institutions are often grouped together, they each have
their own specific treaty bases, visions, and priorities.
If you were to map the member states of these
organizations, you would find significant overlap. For
example, Spain is a member of all the MDBs—although
it is classified as a non-borrowing member of the Inter-
American Development Bank (IADB) and a non-
regional member of the African Development Bank
(AfDB). This multi-organizational membership can be
replicated for the MFIs as well (see Figure 1). There are 167
also a number of subregional organizations that are not
detailed in the figure.
It is estimated that, in 2009, multilateral loans and
guarantees to infrastructure projects in developing coun-
tries represented approximately US$20.4 billion;2
approximately US$6.5 billion in loans and guarantees
went to projects in developed countries. This US$6.5
billion was dominated by direct lending by the
European Investment Bank (EIB). This lending largely
reflects the support that the EIB gave to many public-
private partnership (PPP)–type transactions affected by
the hiatus in the long-term commercial debt markets.
In both cases, the majority of facilities are direct
project loans rather than guarantees. These figures include
lending from both MDBs and export credit agencies
(ECAs).3 The top 10 developing-country debtors are
shown in Table 1. The total debt amount shown in the
table includes private finance as well as multilateral debt.
MLIs typically have an AAA credit rating (see
Appendix A.3) because the rating agencies’ methodolo-
gies are largely based on the ratings of the state or sov-
ereign donors. The agencies also adjust their ratings
according to whether or not contributions have histori-
cally been made on a timely basis. They also consider
how much of a buffer is available in the MLI’s budget
should a proportion of contributions be delayed.
An MLI’s support for the funding of infrastructure
often takes the form of facilitating private-sector invest-
ment, including direct investment in a private-sector
provider, loans and/or guarantees alongside private
 A.4: Multilateral Lending and Other Enablers

Figure 1: Geographic spread of multilateral institutions

World Bank Group, including the IBRD, the IDA, and the IFC affiliate.

OECD: 30 member states across the globe

EBRD
EIB

OPEC Fund

ADB
IDB
IADB AfDB

■ Global multilateral development bank ■ Regional multilateral financial institution

■ Global multilateral financial institution ■ Regional multilateral development bank

Note: ADB = Asian Development Bank; AfDB = African Development Bank; EBRD = European Bank for Reconstruction and Development; EIB = European
Investment Bank; IADB = Inter-American Development Bank; IBRD = International Bank of Reconstruction and Development; IDA = International Development
Association; IDB = Islamic Development Bank; IFC = International Finance Corporation (World Bank Group affiliate); and OECD = Organisation for Economic Co-
operation and Development.

168
finance, or helping to facilitate a market, such as through
providing loan facilities in the local currency. Thus,
MLIs are able to support both the capacity and afford-
ability of private finance.
The way MLIs assist with building the capacity of a
market can be twofold:
when an asset is operational were, in October 2009,
between 70 and 150 basis points, whereas commercial
banks’ margins were between 300 and 350 basis points.
This difference can represent a significant long-term
saving for a project over its whole life.

• to lend alongside commercial banks where there is There are circumstances where both public and
simply a shortage of commercial loans available for private finance will be needed
the project or enterprise—thus filling the gap; and The following is a short summary of some of the areas
where governments can support private finance in infra-
• to support the development of otherwise undevel-
oped markets for private finance.
Table 1: Multilateral lending by country: Top 10 in 2009
The aim—to develop local financial markets—can
Multilateral
be reached in many ways. Often the immediate goal can Total debt institution debt
Country (US$ millions) (US$ millions)
be to strengthen a state’s institutions and organizational
capability. Building this capacity might also include the Papua New Guinea 10,250 9,238

development of individual infrastructure propositions Brazil 5,212 2,377

Chile 2,555 1,755
or programs overall to the point where they are finance-
Bahrain 1,650 1,180
able.
United Arab Emirates 2,200 1,179
MLIs can assist with the affordability of projects
Turkey 1,252 802
because of their ability to provide long-term funding Jordan 795 795
below the cost charged by commercial institutions. This Mexico 705 529
is in part because the MLIs’ cost of funding is lower Saudi Arabia 1,900 490
than that of commercial banks (given their AAA rat- Slovakia 1,388 359
ings), but also because the objectives for their investment TOTAL 27,907 18,704
are not solely measured in terms of the return achieved. Source: Taken from the PFI 2009 League Tables in PFI, 2010.
An example is the EIB’s lending to PPP infrastructure Note: This lending was dominated by an LNG project in Papua New Guinea.

projects where their risk margins for long-term debt


structure in addition to any support available from
MLIs. Issues related more to policy and approach are
covered in Chapter 3.6. Instead, this section focuses on
instances where states might be contributing directly to
financing alongside private finance or where they can
provide direct contractual provisions that facilitate pri-
vate finance.
As with the MLIs, the government’s primary role
concerns market capacity and affordability. The main
routes for this support are:
• co-lending or lending alongside commercial banks
on the same terms as the commercial banks;
• underpinning a proportion of the commercial debt
by providing guarantees on the repayment of debt
should the project or enterprise fail; and
• contributing to the costs (typically these are capital
costs of new assets) through indirect investment
such as the provision of land or direct financial
contributions such as grants.
During the current credit crisis there have been a
number of examples where governments have stepped
up their direct support. An example is the UK govern-
ment’s Treasury Infrastructure Finance Unit (see Case in
Point 1).4 Although the UK government has made a
number of direct loans since the establishment of this
unit, there is anecdotal evidence that just the availability
of this funding has given commercial lenders confidence
in the government’s support for private finance initiative
(PFI) projects, and so they have been able to provide all
of the financing needed.
There are other enablers, such as export credit
agencies
In addition to the direct sources of debt and equity,
there are other important entities that we have referred
to as enablers. These enablers can provide some form of
financial assurance—whether in the form of a guarantee,
an insurance policy, or other contractual support—in
order to help a private investment to get off the ground.
These enablers include export credit agencies.
Export credit agencies, known in trade finance as
ECAs, are most often publicly-owned (government-
owned) institutions that act as intermediaries between
national governments and exporters to issue export
financing. In particular, the ECAs provide assistance to
the country’s exporters to do business overseas. Most
industrialized nations have at least one ECA, which is
usually an official or quasi-official branch of the govern-
ment. Generally, the ECAs focus on increasing exports,
promoting domestic economic development, and help-
ing small- and medium-sized enterprises (SMEs) that
lack access to the capital markets.
A.4: Multilateral Lending and Other Enablers
Case in Point 1: The United Kingdom’s Treasury
Infrastructure Finance Unit
In response to the difficulties in the financial markets, in
March 2009 the UK government announced proposals to sup-
port the provision of private finance to public-private part-
nership–type projects. At the heart of this initiative was pre-
paredness by government to supplement private-sector lend-
ing, where it is available on acceptable terms but insufficient
amounts, to maintain the delivery of a pipeline of infrastruc-
ture projects. In some circumstances the government will
provide 100 percent of the required finance.
The government loans would be on terms similar to
those of the commercial lenders and would rank equally to
commercial lenders.
This support is intended to be temporary and reversible,
with the government loans to be sold to the private sector
once the markets have recovered.
There is some evidence that just the existence of this
government support gave commercial lenders sufficient con-
fidence that projects would reach financial close (when the
financing documents are signed) and that this could be done
without the actual government loans.
169
ECA financing can take the form of credits (finan-
cial support) or credit insurance and guarantees or both,
depending on the mandate the ECA has been given by
its government. The ECAs can also offer credit or cover
on their own account. This does not differ from normal
banking activities. In a similar vein, the ECAs are
unlikely to provide 100 percent of the loan amounts;
they may also require a credit rating.
The ECAs frequently work together with multilat-
eral institutions and commercial banks to provide cred-
its, guarantees, and insurance and to encourage lending
by taking on part of the risk inherent in a deal.
Therefore, the use of export credits has tended to
decrease whenever lenders have been willing to assume
risk without them (for example, in the first part of the
1990s) and to increase when perceived risk has increased
(for example, after the Asian crisis of 1997). The ECAs
can also sign cooperation agreements with other ECAs
in the common case when exports from more than one
country are involved. In this situation, one ECA is usu-
ally designated as a “leader” who provides the total cover
or finance, with the other ECAs involved reinsuring
their shares of the risk.
Because of the complexities involved in bringing in
another party to the project and also because of the rel-
atively high premiums charged by the ECAs (in lieu of a
 A.4: Multilateral Lending and Other Enablers

Figure 2: Simplified ECA transaction structure TAKE-AWAYS

Multilateral and state support

• Multilateral bank support is not just about providing

finance but includes facilitating the use of private finance
Gua rantee and capacity building.

Support agreement
ECA
Premium agreement
• State support for private finance may come in a variety of
Lending
bank ways, from direct lending to provide guarantees. This is
discussed in more detail in Chapter 3c.6.

Loan agreement
Other enablers

• Export credit agencies may be a source of support for

some infrastructure-related transactions, particularly
those involving the export of equipment such as trains.
Foreign
Exporter
buyer
Supply contract

Source: PricewaterhouseCoopers, 2009, internal note.

170
loan margin) to reflect the relevant sovereign, corporate, 4 See http://www.hm-treasury.gov.uk/ppp_tifu_index.htm.

or project risk, ECA loan financing for an infrastructure

project is usually attractive only when commercial
lenders are unwilling to provide the requisite financing. References
In addition, the ECAs primarily support exports of HM Treasury. The Infrastructure Finance Unit (TIFU). Available at
http://www.hm-treasury.gov.uk/ppp_tifu_index.htm.
equipment, while infrastructure contracts usually incur
PFI (Project Finance International). 2010. “League Tables: Not too
significant expenses under their construction agreements
Bad—PF in 2009.” PFI Issue 424, January 13. Thomson Reuters.
and often involve local contractors where no export ele-
ment is involved. For transactions such as high-speed
rail, the passenger cars or rolling stock may be candi-
dates for ECA support. On the other hand, ECA financ-
ing is provided at low fixed rates and ECA involvement
may provide a degree of intangible political support for
the project. Some ECAs also provide loans or guarantees
that are not linked to an export of equipment from the
country concerned.
A simplified transaction structure showing how an
ECA might fit into an infrastructure transaction is
shown in Figure 2.

Notes
1 In many ways, MDBs and MFIs are very similar organizations, but
MDBs are truly global, with a wide membership drawn from
many countries providing a wide range of financial support and
knowledge building. MFIs have a more limited membership and
may have a narrower remit focused more on the financial support
for specific types of projects.

2 PFI 2010.

3 ECAs are financial institutions that provide financial support to

promote exports from their “home” country. Some ECAs are
government-run organizations and some are private companies.
 A.5: Contractual Approaches
APPENDIX A.5 In Chapter 1.1, we described four possible approaches a
state might choose when looking to involve private-sec-
tor parties and private finance:
Contractual Approaches
• Partnership: A contractual approach where both
the public and private parties have a shared interest
in the risks and benefits of a project.

• Concession: A contractual approach where a public

party, usually the state, gives a third party the right
to use land or property for a specific purpose and
for a specific period.

• License: A license is awarded where a party, usually

the state, gives a third party the right to own or use
something.

• Privatization: The transfer of assets and/or opera-

tions from the public sector to private ownership
and management.

There may be many underlying variations to each

of these elements—especially the approaches to partner-
ships and concessions.
The range of contractual approaches to infrastruc-
ture can appear to be a complete alphabet soup of
acronyms. It is helpful to decipher how to group these 171
acronyms into the four main approaches we have identi-
fied, and then how to translate the acronyms to under-
stand the precise contractual approach being described.
Figure 1 allocates the most commonly found acronyms
to the four types of contracts.
Having sorted the acronyms into the types of the
approach into which they fall, we need to decode them.
In Figure 2 are the rules for decoding infrastructure
project acronyms.
These acronyms can then be translated according to
the different activities or roles for each sector during the
construction or development phase (Table 1) and opera-
tional phase (Table 2).

There is no single definition of a public-private

partnership (PPP)
Although only one of many contractual approaches,
PPPs seem to attract a disproportionate amount of
attention. As with the broader infrastructure term, there
has been much discourse about the PPP approach to
fund infrastructure projects, but again there is no single
definition. The term PPP is used by some to describe
any project or opportunity where both the public and
private sectors are parties to the transaction. But this
then captures many economic and social infrastructure
developments, and such usage ignores the ”partnership”
aspect of the arrangement. Other schools of thought
consider PPPs to be linked to those circumstances
where the private sector is providing infrastructure or
 A.5: Contractual Approaches

Figure 1: Acronyms associated with the four types of contracts

From this:

BOO
PFI ROT PPP
BOT ?
? BOOT DBO
?

DBFO P3 BROT BLT

To this:

Partnership Concession Privatization License

PPP DBFO ... ...
PFI DBO
P3 DBOT
BROT
ROT
BOO
BOT
BOOT
BLT

172
Figure 2: Rules for decoding infrastructure project acronyms

Operate
or own
Design Lease Refurbish

Build Finance Maintain Public-Private Transfer

 A.5: Contractual Approaches
Table 1: Roles for the public and private sectors during Table 2: Roles for the public and private sectors during
the construction or development phase the operational phase
Other possible Public sector can: Private sector can:
options for
Public sector can: Private sector can: the public sector Partner with the private sector Partner, operate and maintain
Be a partner with Be a partner with a
Let a concession Be the concessionaire to
a private-sector public-sector entity
operate and maintain
entity and design &
build the infrastruc- Award the license Be the licensee
ture asset
Privatize Become the owner and
Let a concession Be concessionaire Sale and lease- operator
to design and build back the asset
the infrastructure
asset
• A formalization of the risk allocation between
Transfer the new
the public and private sectors in all conceivable sit-
asset back to the
public sector uations.

Award the license Be the licensee

• A definition of each party’s legal rights and
The public sector is N/A N/A obligations.
unlikely to privatize
without existing • Provisions for the consequences of
fully operational
situations where there might be a need to terminate
assets
the contract earlier than anticipated.

Note
infrastructure-related services that were traditionally
1 A shadow toll occurs where the public authority pays an amount 173
provided by the government—that is, projects that are to the private-sector party to reflect usage/demand based on
more focused on social infrastructure, or that involve the number/type of vehicles using a road. Sometimes this amount is
adjusted for other factors such as the availability of the road and
transfer of risk from the government to the private sec- the quality of the performance of the operations.
tor. Further, some concessions will also be classified as
PPPs. Perhaps the PPP term is better used to describe
the philosophy behind the approach, capturing such ele-
ments as partnerships, risk transfer, and social service,
rather than the contractual approach itself.

There are five main elements that a partnership or con-

cession contract will need to capture
Given that these types of contract create a closer rela-
tionship between the public and private parties, it is
worth thinking about the main elements that the con-
tract needs to capture. There are five main elements:

• A detailed description of the facility/service

required by the public sector. This is often an
output-based description rather than an input-based
one. For example, the contract for a road should set
out the route, the intersections required, the life of
the assets, and so on, but it will not set out the con-
struction method to be used.

• A detailed description of how the private sector

will get paid for providing the facility or service.
The options will range from availability and per-
formance payments, lease payments, shadow tolls,1
and user-based payments to grants, subsidies, and
tariffs.
 A.6: Risk and Uncertainty
APPENDIX A.6 Any discussion of infrastructure and private finance
will include reference to risk and whether the proposal
presents a manageable risk profile for the provider of
Risk and Uncertainty private finance.

There is a need to distinguish between risks and

uncertainties
In essence, “risk” usually refers to the obstacles to
achieving the forecasted return from investment or debt
repayment, although there is also a need to consider
those risks that might remain with the public-sector
party. But to talk just about risk is probably over-sim-
plistic; instead, consideration should be given to identi-
fying both the risks and the uncertainties for a given
proposition. There are no precise definitions for these
two factors, but for the purposes of this Report we will
use the following:

• the term risks will apply to events that have a meas-

urable probability; and

• the term uncertainties will apply to events that are

indefinite.

To illustrate the difference between risk and uncer-

tainty, Table 1 shows a possible list of factors that might 175
fall into the risk category and those that might go in the
uncertainty category. In the table, the split between risk
and uncertainty has been expanded to differentiate
between the impact of an event that is variable, where
the impact could be positive or negative and vary over
time, and the impact that is simply binary—where it
either happens or not. In the case of binary events, we
have assumed that the impact is negative.

An estimate of the cost of each risk should be made

The focus on risk underpins the financial analysis
of a project or opportunity because each risk should be
allocated a theoretical cost. In reality, however, this cost
is likely to be a range of estimates rather than a point
estimate. The simple calculation is shown in the
following equation:

Expected cost of risk = probability of risk occurring

× cost if risk occurs

It is this calculation of the expected cost of risk that

makes the discrimination between risk and uncertainty
important: it is easier to put a price on risks but can
be very difficult, if not impossible, to put a price on
uncertainty.
 A.6: Risk and Uncertainty

Table 1: Impact of various risks and uncertainties

Risk Uncertainty
Variable impact: Variable impact:
Impact can be positive or Binary impact: Impact can be positive or Binary impact:
negative and can change Impact happens or it does not. negative and can change Impact happens or it does not.
Factor over time. Assumes impact is negative. over time. Assumes impact is negative.

Technical • Capital costs differ • Contract effectiveness • Technology performs • Technology does not
from those forecast (the private-sector differently from the work as expected
party is not left with way it was forecast
• Operational costs, any it thought had
including maintenance, been passed on
differ from those to another party)
forecast
• Construction
• Price of inputs— completion is late
e.g., feedstock

Markets • Revenue risk if linked • Revenue risk if • Force majeure

to performance linked to demand

Performance • Failure to achieve

of obligations required operational
under the performance
contract

Financial / • Cost of debt • Availability of debt • Market failure

Economic
• Exchange rate • Unavailability
of insurance
176 • Interest rate

• Debt margin
(either bank or
capital markets)

• Inflation/deflation

• Cost of insurance

Political • Political • Change of law, either

consequences interference general or specific to
sector

• Legal and regulatory

enforcement

• Expropriation

• Political interference

• Currency convertibility

Other • Procurement process: • Counterparty failure

—duration and • Land acquisition
—competition • Climate change—
e.g., flooding

Minimizing the expected cost of risk is critical to
achieving value for money
If the private-sector party is thinking about risk, uncer-
tainties, and their associated costs, then so must the pub-
lic-sector party. This is because the “price” that the pri-
vate sector attaches to taking on a particular risk or
uncertainty will feed into any value-for-money analysis
or comparison of public or private finance. No party
can totally eliminate all of the risks and uncertainties.
The question is how best to reduce the likelihood of
the risk of a particular adverse event occurring and how
best to reduce the financial impact if it does occur by
addressing the following questions:
• Who is best placed to reduce or mitigate the proba-
bility of the event occurring?
• Who is best placed to manage the costs of the event
if it does occur?
As many of the uncertain events concern the macro
socioeconomic environment, they will most likely sit with
the public sector. Key issues go beyond their cost to more
fundamental questions about whether the private sector
wishes to invest in that environment. For example, if
potential investors think that political interference is
likely, then they may look to invest elsewhere.
Reducing the probability of the event occurring
The question “Who is best placed to reduce the proba-
bility of the event occurring?” should be asked for every
aspect of the transaction and should go beyond the
headline event. For example, it is likely that the private-
sector party is best placed to take the responsibility for
the design and construction of any new infrastructure.
However, if the infrastructure is being renovated or
upgraded, it may be that the public sector is better
placed to take the responsibility for the condition of the
existing infrastructure, unless the public-sector parties
are able to provide extensive information or allow sur-
veys that can be used to establish its current condition.
Managing the event
The second leg of the risk equation is “Who is best
placed to manage the costs of the event if it does
occur?” In many instances, this will be the same party
that is best able to reduce the probability of the risk
occurring, but there will be instances where these par-
ties differ. Such circumstances may lead to the conclu-
sion that it is better for the contract parties to share a
risk. For example, the occurrence of force majeure
events—such as fire, flood, sonic boom, or volcanic ash
cloud—are beyond the control of the private sector, but
private-sector players may be able to adjust their operat-
ing service to minimize the impact of these events, in
terms of both cost and time, on the infrastructure. So, in
this instance, the two parties may wish to share the risk.
A.6: Risk and Uncertainty
When considering both parts of the risk equation,
consideration needs to be given to how to mitigate the
risk. Some of the options, among others, that might
exist include:
• Contractual option: Once the allocation of risks
has been worked through, the contract must be
clear on the respective responsibilities of all parties
to ensure that there are no “orphan” risks. This can
be an issue not only in the terms of the contract
between the public and private parties but also with
the private parties’ subcontract arrangements. Often,
in order to support the allocation of risks, the par-
ties will seek additional guarantees or warranties to
back up their obligations. Such guarantees may take
the form of supporting the performance of the
party and/or giving financial backing should that
performance fall short of what is required.
• Financial option: The lenders are likely to put
conditions on their finance contracts to try to miti-
gate certain risks. For example, if there is a con-
struction phase, the lender might retain a small per-
centage of the borrowings to create a small reserve
of funds to be released only on the completion of
the work. Alternatively, the lender may embed
reserve-account mechanisms in the finance docu- 177
ments to deal with variable costs—for example, to
deal with major maintenance matters over the life
of the asset.
• Insurance option: In many instances, risks can be
insured against. The main decisions to be made are
then whether the insurance represents good value
for money or if the party prefers to self-insure; who
takes the risk on the premiums changing over time;
and who takes the risk on the availability of insur-
ance over time. For example, in the United
Kingdom, at times it has been very difficult to
insure schools because of the high risk of arson.
Also major terrorism events can affect the cost and
terms of insurance.
• Portfolio option: Whether the risk sits with the
public or private sector, consideration should be
given to the extent to which individual
project/opportunity risks can be mitigated, or pos-
sibly accentuated, by a portfolio effect. For example,
an equity investor with a global portfolio may be
willing to take a degree of political risk with one
investment if that risk does not sit with its other
investments, because looking at the risk on a port-
folio rather than on an individual investment basis
lessens the potential impact of the threat. The chal-
lenge will, of course, become more of an issue as
the predicted risk will mean more specialist
 A.6: Risk and Uncertainty

investors who may find they have more systemic

risk in their portfolios (see also Chapter 3c.3).

Assessing risk is at the heart of any business, and in

this respect infrastructure is no different. Where infra-
structure probably differs from mainstream corporate
activities is, first, in its reliance on the performance of a
single asset to deliver a profit; this creates a need to
understand in detail the challenges to achieving the
required performance. Second, much infrastructure
involves a relationship between public and private par-
ties, whether this relationship is established through
partnerships, concessions, regulations, or users.
Investors and lenders will spend much time consid-
ering the risks they will accept, based on historical per-
formance, specialist advice, and so on. But they will
always struggle to accept some particular events that
may be regarded as uncertainties and beyond their abili-
ty to control or manage in any way. Given this, it is like-
ly that the public sector, rather than the private one, will
need to “own” and manage many of these uncertainties.

178
Appendix B
List of Acronyms
 Appendix B: List of Acronyms
AAI Airports Authority of India IAAI International Airports Authority of India

ADB Asian Development Bank IADB Inter-American Development Bank

ADBI Asian Development Bank Institute ICF Infrastructure Crisis Facility

ADIA Abu Dhabi Investment Authority IDB Islamic Development Bank

AFD Agence Française de Développement IDFC PE Infrastructure Development Finance Company

Private Equity
AfDB African Development Bank
IFC International Finance Corporation
AMT alternative minimum tax
IFI International finance institution
ASX Australian Stock Exchange
IFSL International Financial Services, London
BNDES Brazilian Development Bank—O banco nacional do
desenvolvimento IIFCL India Infrastructure Finance Company Limited

BRIC Brazil, Russia, India, and China IMF International Monetary Fund

CAPM Capital Asset Pricing Model IPO initial public offering

CBD central business district IRR internal rate of return

CDA comprehensive development agreement IRS US Internal Revenue Service

CDC Caisse des Dépôts (France) KfW KwW Bankengruppe (Germany)

181

CIA Central Intelligence Agency LCC Lekki Concession Company

COMESA Common Market for Eastern and Southern Africa LNG liquefied natural gas

CPP Canada Pension Plan MAT Miami Access Tunnel

DBFO design, build, finance, and operate MDB multilateral development bank

DBFOM design, build, finance, operate, and maintain MdTA Maryland Transportation Authority

DBOT design, build, operate, and transfer MEDCO Maryland Economic Development Corporation

DBSA Development Bank of South Africa MFI multilateral financial institutions

DCT Doraleh Container Terminal S. A. MIGA Multilateral Investment Guarantee Agency (of the
World Bank Group)
DIAL Delhi International Airport Private Limited
MLI multilateral institution
EBRD European Bank for Reconstruction and
Development MP3IC Multilateral Public-Private Partnership in
Infrastructure Capacity Development
ECA export credit agency
MPA Maryland Port Administration
EIB European Investment Bank
MSEB Maharashtra State Electricity Board (India)
EPC engineering, procurement, and construction
MTR Mass Transit Railway Corporation (Hong Kong)
EPCM engineering, procurement, and construction
management NAA National Airports Authority (India)

EPEC European PPP Expertise Centre NAO National Audit Office (United Kingdom)

ETR Express Toll Route NPV net present value

EU European Union NSE National Stock Exchange (India)

FDOT Florida Department of Transportation OECD Organisation for Economic Co-operation and
Development
FY full year
OFWAT The Water Services Regulation Authority
GDLN Global Distance Learning Network
(United Kingdom)
GDP gross domestic product
O&M operation and maintenance
GoI Government of India
OTPP Ontario Teachers’ Pension Plan
GPO Government Printing Office (United States)
P3 public-private partnership
 Appendix B: List of Acronyms

PAB private activity bond

CURRENCIES
PAC Ports America Chesapeake

PFI Private Finance Initiative (United Kingdom) $A Australian dollar

PFI Project Finance International £ British pound

PPIAF Public-Private Infrastructure Advisory Facility C$ Canadian dollar

PPP public-private partnership € euro

PPS service provision contracts (the acronym for the RMB Chinese renminbi
Spanish term)
R$ Brazilian real
PR public relations
Rs Indian rupee
PROPARCO Promotion et Participation pour la Coopération
US$ US dollar
économique—The Investment and Promotions
Company for Economic Cooperation (France)

PSC public-sector comparator

PUK Partnerships UK

PwC PricewaterhouseCoopers

QPAB qualified private activity bond

RAV Richmond-Airport-Vancouver

ROT rehabilitate, operate, and transfer

S&P Standard & Poor’s

SBI State Bank of India

SCC Skyway Concession Company

SCUT Sem Custos par os Utilizadores—No Cost to the

Users (Portuguese)
182 SME small- and medium-sized enterprise

SMRT Singapore ‘s multimodel transport provider

SNC SNC-Lavalin

SWF sovereign wealth fund

T&TI Tunnels & Tunnelling International

TEU twenty-foot equivalent unit

TIFIA Transportation Infrastructure Finance and

Innovation Act

TIFU The Infrastructure Finance Unit (United Kingdom)

TIGER Transportation Investment Generating Economic

Recovery

TxDOT Texas Department of Transportation

UNCTAD United Nations Conference on Trade and

Development

US DOT United States Department of Transportation

VGF Viability Gap Funding (India)

 Acknowledgments
Acknowledgments

This Report would not have been possible without the

invaluable contributions and feedback of the members of the
Expert Committee. On behalf of the World Economic Forum,
we would like to express our gratitude to them.
We are thankful to the numerous individuals at
PricewaterhouseCoopers who provided information and
support. Particular thanks go to Gareth Turpin and Alexis
Pomfret who provided considerable help with the research.
We would also like to express our gratitude to Subha
Nagarajan, African Development Bank; Victor Lee You, Asian
Development Bank; Tim Reynolds, Highstar Capital; and Amit
Mahensaria, IDFC Private Equity for their contributions to spe-
cific sections of the Report and case studies.
Thank you to Hope Steele, Neil Weinberg, Kamal
Kimaoui, and the Publications Team at the World Economic
Forum for their assistance in the production of this Report.
Samantha Tonkin at the World Economic Forum also deserves
special thanks for assisting in the communication process.
Last, but not least, thanks to Elisabeth Bremer, Donald Curry,
Arun Eapen, and Takae Ishizuka at the World Economic Forum.
183
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Economic Forum is impartial and not-for-profit; it is
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